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The Global Intelligence Files

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Fwd: You made the cover of MENA Fund Review...

Released on 2012-10-19 08:00 GMT

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Fwd: You made the cover of MENA Fund Review...

Issue 1, July 2011

REVIEW

Political decisions will be key to Egypt regaining economic momentum lost in overthrow of Mubarak regime

Undercurrent

On the up
Arab Spring catalyst to increase in infrastructure investment across the region

New order
Intra-emerging market trade a growing force Ayesha Sabavala, deputy editor, The Economist, Middle East and Africa

EDITORâ€™S LETTER
Changes sweeping the region
WELCOME to the first edition of MENA Fund Review, your bi-monthly overview of the Middle East and North Africa asset management industry and issues affecting it. Much has been happening across the MENA region in recent months. A large part of it continues to remain unstable as tension and protests persist. In Egypt there have been demonstrations by both pro-democracy activists and Islamist groups as the scramble for power post-Mubarak becomes more frantic. Until stability can be returned the countryâ€™s economy remains frozen (see pages 16-17). But observers believe decisions will be made in the coming months and years to create positive momentum and this will lead to increasing investment opportunities. The Arab Spring has created a greater urgency to improving the regionâ€™s infrastructure (see pages 22-24). Plans that were in place have been fasttracked in some cases, and new short-term infrastructure development schemes have been set in motion. Governments have been forced to examine infrastructure investment as a means of both improving quality of life and creating jobs that can stimulate the economy and ultimately calm unrest. Protests across the region have thrown a spotlight on the telecommunications sector. The use of social media to organise protest and spread information has seen it grow in popularity and with it telecoms in general has come on the radar as an increasingly attractive investment opportunity (see pages 28-29). A dramatic rise in intra-emerging market trade is also throwing up new areas of interest for fund managers in the region (see pages 26-27). Trade with China and India specifically has become a phenomenon that is changing the face of global relations. This applies not just to trade relations, but also to political alliances and increasingly security arrangements too. Underlying the changes that have swept the MENA region in recent months, age-old battles for power continue to be waged, nowhere more so than in Lebanon where a new cabinet and an international tribunal into the killing of a former president have stirred up a mix of rivalries (see pages 18-21). The desire of Iran and Saudi Arabia to hold influence over the Levant region, combined with the geopolitical interests of a host of other players, are creating risks that asset managers should be aware of as they could quickly escalate. I sincerely hope you enjoy reading the magazine and I look forward to your feedback and support in covering the regionâ€™s asset management industry.

On the up Infrastructure investment set to rise Ahead of the crowd Proï¬le of QInvest investment bank New order The intra-emerging market trade story The social media revolution Interest in telecoms rising off Arab Spring

FEATURES

22 25 26 28

Road to recovery Egypt emerging from instability

ANALYSIS

Roll out the barrel Paddy Gourlay on the regionâ€™s oil markets

COLUMN

15

Laws of attraction Reasons to look at Luxembourg A different pathway Proï¬le of Apex Fund Adminstration

Key requirements Regulations drive importance of choosing the right adminstrator

INDUSTRY COMMENT

38

JULY 2011 MENA FUND REVIEW 05

NEWS

INDUSTRY NEWS
Emirates NBD named best Middle East asset manager
ABU DHABI: Emirates NBD Asset Management Limited, a wholly owned subsidiary and the asset management arm of Emirates NBD, a leading bank in the Middle East, has been named the regionâ€™s â€œBest Fund Management Company,â€ at the annual Arab Achievement Awards 2011. An award ceremony was held in Abu Dhabi alongside the Arab Investment Summit 2011. In four years Emirates NBD Asset Management has grown to become one of the largest asset managers in the UAE, managing one of the widest ranges of public mutual funds. With over AED 4.5 billion (US$1.2 billion) of assets under management, the company currently manages 13 different funds across a range of asset classes. These include its MENA equity and ï¬xed income funds, global risk proï¬led funds and a complete suite of Shariah compliant vehicles. â€œOur investment strategies are strongly research-driven and value focused,â€ said Deon Vernooy, senior executive ofï¬cer. â€œWe believe our success comes from strategic asset allocation, driven by a combination of rigorous quantitative testing and professional qualitative assessment, which leads to the optimal balance between risk and return.â€ As a specialist investment manager with expertise in Arabian and global mandates, Emirates NBD Asset Management offers exposure for investors to regional and global markets. International channels and partnerships, including life insurance platforms and ï¬nancial intermediaries also provide access to Emirates NBD Asset Management funds globally. Emirates NBD Asset Management has been nominated for various awards in the past. Its MENA Opportunities Fund was nominated for the Balanced Fund of the Year award at the MENA Fund Manager 2011 Performance Awards. The Emirates Islamic Money Market Fund was nominated for the Best Islamic Investment Product, while the Emirates MENA High Income Fund was nominated in the Best Mutual Fund category at the Bankers Middle East Products Awards 2011. Emirates NBD Asset Management was named Best Asset Manager - MENA region in the 2009 MENA Investor Awards and won the award for Best Newcomer at the London Sukuk summit for its innovative closed-ended structure, the Emirates Sukuk Fund No 1 Limited, in the same year. At the 2011 Arab Achievement awards, Emirates NBD Asset Management was also nominated in the category â€˜Leader in Islamic Investments.â€™

ETF launch delayed due to tense political environment
ADVERSE market conditions and the decline of the Muscat Securities Market (MSM) in particular have led to an indefinite delay in the launch of the ï¬rst Oman exchange-traded fund (ETF). Saudi investment bank Falcom Financial Services planned to launch Omanâ€™s ï¬rst ETF later this year, although it was yet to receive approval from the Capital Market Authority (CMA). Sami al Ruz, Falcom Financial Servicesâ€™ representative in Oman, told Muscat Daily that the launch has been delayed due to unfavourable market conditions and the tense political environment in the region. â€œTiming is key when you launch a product which is completely new to a market. We were supposed to launch it earlier, but the market conditions were not favourable,â€ he said. Falcom is likely to wait until the end of Ramadan for the launch, added Ruz. MSM signed a deal with Falcom to launch the equity-based ETF in September last year. Falcom Financial Services launched its ï¬rst ETF in Saudi Arabia in early 2010. So far, only Saudi Arabia and Abu Dhabi have launched ETFs on their bourses in the GCC.

OIFC WITHDRAWS FROM RASMALA
Oman Investment and Finance (OIFC) withdrew plans to invest $5m in Rasmalaâ€™s private equity fund in June, prompting the investment bank to change the fundâ€™s focus to a deal by deal basis, whereby it will identify potential deals and advise investors to invest in them. OIFCâ€™s decision was largely based on concerns about political stability in the Middle East, according to reports. The Shariah compliant Rasmala MENA Private Equity Fund 2 is the firmâ€™s second private equity product. Its first was liquidated in 2006. OFIC announced its withdrawal from the fund in a statement to shareholders through the Muscat Securities Market, adding that there were no â€œcommitments or liabilities to the fund.â€ â€œWe place for your information that as there are issues relating to the establishment of the fund, we have withdrawn the participation in the fund,â€ the statement said.

Firms form Saudi partnership
BAKHEET Investment Group and London-based Trinity Group Limited have formed an alliance to bring foreign investment into Saudi Arabia. According to the ï¬rms they will â€œbring in foreign investments to the Saudi market through marketing and distributing Bakheet products and services to global ï¬nancial institutions and funds.â€ Bakheetâ€™s funds include the Shariah-compliant Saudi Trading Equity Fund.

Have some news to share? Then call our editorial department on +44 (0) 1332 292432

06 MENA FUND REVIEW JULY 2011

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NEWS

Regionâ€™s HNW require greater control levels
MIDDLE Eastern high net worth individuals are a complex group when it comes to investing and ï¬nancial decision making with a strong desire for greater levels of control when compared to other markets, according to a report by Barclays Wealth. Globally the report found that despite their wealth, 41 percent of high net worth individuals wish they had more self-control over their ï¬nancial behaviour and that a need for increased ï¬nancial discipline is likely to be felt most by those at the wealthiest end of the scale (Â£10m+), where 45 percent of respondents wish they had more self-control. This is despite the report showing that those who want self-control are less likely to be satisï¬ed with their ï¬nancial situation. Globally, respondents in Asia-Paciï¬c had the greatest desire for more ï¬nancial discipline, particularly in Taiwan and Hong Kong. In contrast, developed markets showed less of a desire for self-control over ï¬nancial behaviour. In the Middle East, HNWIs showed complex behaviour towards investing and ï¬nancial decision making. In Saudi Arabia, HNWIs revealed a tendency to purchase illiquid assets to avoid the urge to sell investments when markets fall â€“ 90 percent of respondents reported this. Saudi HNWIs also prefer to use rules and guidelines to help them make better ï¬nancial decisions, with 96 percent of respondents saying that they use rules in ï¬nancial decision making. On a regional level, Saudi HNWIs are inclined to set ï¬nancial deadlines (96 percent) and have a high tendency to delegate ï¬nancial decisions to others (90 percent). In the UAE, there is also a willingness to delegate ï¬nancial decisions (82 percent). Respondents in the UAE also favour setting ï¬nancial deadlines for themselves (96 percent) and over three quarters (76 percent) think that buying and selling often will enable them to do well in the ï¬nancial markets. In Qatar, the report shows that respondents are by far the most likely to delegate ï¬nancial decisions (98 percent). They also favour active portfolio management to achieve good results in the ï¬nancial markets, and prefer to strategically time markets as opposed to adopting â€˜buy and holdâ€™ strategies. Forty-two percent of Qatari HNWIs also said that they prefer to deal swiftly with bad investments and protect themselves from the downside. Soha Nashaat, CEO of Barclays Wealth, Middle East and North Africa said: â€œThis report provides an in-depth study into the ï¬nancial personalities of wealthy investors in the Middle East and gives a fascinating insight into their behaviour. When it comes to ï¬nancial discipline, there is a desire for greater control when compared with other markets. These results present an interesting challenge for the wealth management industry in the Middle East. Clearly, more needs to be done to help clients understand their ï¬nancial personality and the beneï¬ts of using ï¬nancial self-control strategies.â€ The report, Risk and Rules: The Role of Control in Financial Decision Making, is based on a global survey of more than 2,000 HNWIs. According to Barclays, it shows that â€œemotionalâ€ trading can cost investors up to 20 percent in returns over a ten-year period and that those who employ high strategy usage have on average 12 percent more wealth that those who do not use rules.

Endowment fund raises emerging market allocation
THE University of British Columbia plans to raise its emerging market allocations, according to reports. The $950.2m endowment fund currently invests 0.3 percent of its assets in emerging equity, and will increase this to ï¬ve percent by September and 10 percent by September next year. Earlier this year the endowment fund redeemed $1.7m from the NCH Emerging Russia Legacy Fund. At the end of March it was invested 20 percent in ï¬xed income, 50.7 percent in public equity and 29.3 percent in alternatives. The fundâ€™s new strategy will see public equity allocations increase to 55 percent, alternatives reduced to 25 percent and ï¬xed income remain unchanged at 20 percent. Portolio managers on the endowment fund are currently reviewing indexed fund managers for an initial emerging markets mandate, worth three percent of the ï¬nal 10 percent target.
JULY 2011 MENA FUND REVIEW 07

Gulf Capital to launch
GULF Capital, an alternative asset manager, plans to launch a $250m to $300m credit fund. The Gulf Credit Partners Fund will target returns of 15 to 17 percent, investing in private equity-backed acquisitions and growth capital for companies where debt ï¬nance is an attractive alternative to equity.
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The fund, targeted at institutional investors, will be the largest mezzanine and credit ï¬nance fund in the Middle East, according to Karim El Solh, the ï¬rmâ€™s chief executive ofï¬cer. The launch is currently still pending regulatory approval but is expected to take place before the end of the year, according to reports.

NEWS

Gulfmena launches equity focussed relative value fund
GULFMENA has launched a long-only relative value fund focused on MENA equity markets. The Luxembourg-regulated Gulfmena Access Fund will look to capture excess returns in MENA equity markets relative to the S&P Pan Arab Composite Index. It will be managed by Haissam Arabi and his team from Gulfmena Investments, a Dubai based and DFSA regulated asset management company which recently won the Asian Investorâ€™s 2011 Investment Performance Awards, Middle East Onshore Fund House. â€œInvestors, especially foreign investors, still look at the region as an out of index bet and are speciï¬cally interested in the volatility it offers,â€ said Arabi, CEO and fund manager of Gulfmena. â€œ â€œThey are interested in taking advantage of a directional call on high oil prices, a peak in the commodities cycle or on purely event or thematically driven situations due to, for example, excessive government spending.â€ The fund is actively managed and designed to capture the upside potential of MENA equity markets and their directional sector speciï¬c moves, he added. Gulfmena also manages an absolute return fund and with the launch of this long-only relative value fund hopes to now cater to both alternative and traditional investors seeking access to the region. The company raised more than $65m in assets under management in its second year of operations, despite difï¬cult regional markets and a challenging fund raising environment. It has also added two directors to its board, Amjad Al Dwaik and Mark DeSario. Its shareholder base now includes, in addition to the managementâ€™s share, prominent families from the region including the Malhas Family, a Saudi based family ofï¬ce. â€œWe are and continue to be committed to the region despite recent events. The launch of this fund is a clear demonstration of that commitment,â€ said Al Dwaik. â€œOur goal is to offer investors the best solutions for extracting value on their investments and portfolios in MENA. We believe that the Gulfmena Access Fund exempliï¬es that objective. Its launch comes at a time when the region is faced with turmoil, re-emphasizing the opportunities the region offers, as well as taking advantage of distorted and cheap valuations today which will represent tremendous value tomorrow.â€

IMF agrees $3bn loan with Egypt to aid recovery in wake of popular uprising
CAIRO: The International Monetary Fund and Egypt have agreed a $3bn loan. The money will help the North African country to fund its widening budget deï¬cit in the wake of a popular uprising earlier this year. The 12-month loan comes with other pledges of international support after clashes that saw the ousting of President Hosni Mubarak, damaged tourism and industrial revenues. According to French president, Nicolas Sarkozy, a group of countries will provide $10bn in direct aid to Egypt and Tunisia, the other Arab country where a popular uprising unseated the president. Oil exporting countries in the Gulf including Kuwait, Qatar and Saudi Arabia will contribute another $10bn. Institutions such as the World Bank and the African Development Bank could have also pledged more than $20bn for Egypt and Tunisia through 2013. In May U.S. President Barack Obama promised Egypt $1bn in loan guarantees through the Overseas Private Investment Corporation and the cancellation of $1bn in debt, about a third of what it owes the U.S. The Egyptian authorities have now put in place a â€œhomegrown economic program with the overarching objective of social justice,â€ according to Ratna Sahay, deputy director of the Middle East and Central Asia Department at the IMF and head of an IMF mission. On June 1 Egyptian ï¬nance minister Samir Radwa said the
08 MENA FUND REVIEW JULY 2011

countryâ€™s budget deï¬cit may reach 11 percent of gross domestic product in the ï¬scal year that ends June 2012, compared with an expected 8.6 percent in the current one. The economy is expected to grow 2.6 percent this ï¬scal year, accelerating to 3.2 percent the following year, he added. Investment bankers described the IMF loan as a â€œpositive signâ€ that showed conï¬dence in an economic recovery.

SHARIAH-SENSITIVE ASSET POOL HUGE
THERE is a huge pool of Islamic assets that Middle Eastern markets could tap into. The global Islamic fund industry is around $55bn, while the potential Islamic wealth pool is currently about $480bn, according to estimates by consulting This offers huge potential for countryâ€™s in the MENA region to attract substantial amounts of foreign direct structure investment, according to observers. If regulatory and institutional frameworks continue to improve across the region, â€œShariah-sensitiveâ€ assets are likely to be an area of growing attention in the coming years.

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NEWS

Geopolitical factors push SWFs towards local development
GEO-POLITICAL drivers could be drawing money ï¬‚ows towards local development, according to Invesco Asset Managementâ€™s second annual Middle East fund management study. The study reveals that contrary to the widely held view that the majority of sovereign wealth fund assets in the GCC region put money into what is termed â€˜policy supportingâ€™ investments; either trophy assets to build the proï¬le of a region or investments to support foreign policy, this accounts for around just ï¬ve percent of SWF assets, illustrating a recent shift to more locally focused investments and balanced equity investment. The study also suggests that more money is shifting locally in the wake of unrest in the region. Nick Tolchard, head of Invesco Middle East, said: â€œThe current uprisings in Egypt and other Arab countries have driven greater local and regional allocations by some state entities which could justify short-term reclassiï¬cations from â€˜diversiï¬cation vehiclesâ€™ to â€˜development agenciesâ€™. â€œOn the surface this would seem to make sense as a means to placate rising unrest, but in some markets such as Qatar there are possible local inï¬‚ationary pressures to consider as the local pool of capital increases - though this will not be the case everywhere.â€ According to the study six percent of GCC SWF assets are focused on local development investments, 88 percent are invested internationally for diversiï¬cation purposes and ï¬ve percent are invested internationally to drive foreign or local policy outcomes. Traditional investment sovereign wealth funds - diversiï¬cation vehicles and asset managers - appear to be showing a greater shift in their asset allocation towards developed markets. In Invescoâ€™s 2010 study 64 percent of traditional investment sovereign wealth funds showed a preference for emerging markets, in contrast to just 25 percent of sovereign wealth funds and sovereign agencies in 2011. For an average sovereign wealth fund portfolio, Invesco estimates that 54 percent of GCC SWF assets are now held in developed market investments with the highest exposures to North America (29 percent) and to Western Europe (19 percent). Tolchard commented: â€œLast yearâ€™s study identiï¬ed a consistently high demand for emerging markets across sovereign wealth funds and all other companies and territories. We are now identifying a growing trend towards more developed markets, as investors seek new and possibly more fruitful investment opportunities in undervalued developed markets. However, an important nuance is that it is a case of there being more money on the table to invest in developed markets, rather than investors moving out of emerging markets. â€œInvestors are in fact becoming more discerning over their emerging market investments and taking a more sophisticated approach. We are seeing many looking for speciï¬c emerging market opportunities such as Turkey and India, rather than broad-based investment in BRIC or global emerging markets. The research was Invescoâ€™s second asset management study of the GCC region (comprising the UAE, Saudi Arabia, Qatar, Bahrain, Kuwait and Oman). Invesco worked with independent strategy consultants NMG to conduct the study, based on over 100 face-to-face interviews on retail and institutional investor preferences across the GCC.

launches balanced fund
RIYADH: Saudi-based Al-Rajhi Capital, the investment banking subsidiary of Al-Rajhi Bank, has launched an open-ended balanced fund. The Al-Rajhi Multi Asset Conservative Fund is the third fund within the ï¬rmâ€™s balanced fund range. It applies the same investment allocation strategy as other funds within the range, but with a lower level of risk. The fund can invest up to 15 percent of its assets in equity funds and hold up to 100 percent in commodity mudaraba funds. Within these limits, it has the ï¬‚exibility to change allocation to growth assets and defensive assets according to market conditions. The fundâ€™s aim is to provide a high level of capital preservation and growth in assets with a lower risk framework by creating a balanced portfolio of equities and murabaha, according to the ï¬rm. It uses top down asset and country allocation combined with manager investment expertise to determine the optimum assets allocation. Commenting on the fund launch, Gaurav Shah, CEO of Al Rajhi Capital, said: â€œThis new fund complements our existing range of balanced funds by offering further choice to investors who have a lower risk tolerance and lower appetite for capital ï¬‚uctuations. â€œThe fund aims to generate steady incremental performance from the murabaha exposure while adding capital through opportunistic exposure to the equity sector, using the range of investment vehicles available for the market circumstances. â€œThe Al Rajhi Multi Asset Conservative Fund seeks to build on Al Rajhi Capitalâ€™s strong and proven asset allocation and risk management capability to capture some of equityâ€™s gains and generate positive performance for investors without having to face all of its volatility.
JULY 2011 MENA FUND REVIEW 09

Samena Capital launches special situations fund
SAMENA Capital has launched the Samena Special Situations Fund II, the successor to its ï¬‚agship Samena Special Situations Fund. The fund will operate through a seven year close-ended private equity style structure, leveraging the collective acumen of Samenaâ€™s shareholders and investment team, whose business expertise spans the economic hubs
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of the Middle East, Asia and India, according to the ï¬rm. The fund will build strong minority stakes in listed companies that are stable mature businesses with high calibre management that can beneï¬t from access to opportunities that Samena Capital provides, the company said in a press release.

NEWS

Saudi leads assets under
JEDDAH: The MENA asset management industry had $64.5bn in assets under management at the end of the ï¬rst quarter of 2011, according to business intelligence provider Zawya. Saudi Arabia led the way with 243 domiciled funds and $23.7bn in assets under management, followed by Morocco with $13.2bn and Kuwait with $8.9bn. Every country in the region posted a net funds outï¬‚ow with the exception of Jordan, which saw in inï¬‚ow of $1.6m and Oman, with an inï¬‚ow of $1.3m. And of 12 asset classes surveyed, just ï¬ve posted a net inï¬‚ow, with the rest showing a net outï¬‚ow. The largest outï¬‚ow - $1.52bn - was in trade ï¬nance funds, while the largest inï¬‚ow $139m - was in ï¬xed income. Thirteen funds were launched in the quarter, including eight conventional and ï¬ve Islamic. Equity funds constituted the largest share of these, with four being launched, including two conventional and two Islamic, followed by balanced funds with three conventional launches. All GCC-focused launches were of Islamic funds.

Growing interest in alternative strategies
THERE is increasing interest in alternative investment funds across the Middle East, according to a survey by Dubai-based Trust Securities, a derivatives intermediary and investment house. Strong performance, particularly among managed futures funds, is attracting investor attention due to current market volatility, the ï¬rmâ€™s research found. Demand for managed futures is also being driven by a desire among investors to hedge against risks caused by inï¬‚ation, a low US dollar, poor equity markets and a global shortage of capital funding. By the ï¬rst quarter of 2011, assets under management in managed futures funds had grown to over $290bn, or more than 14 percent of total hedge fund industry assets, according to research by Barclay Hedge. This represents more than 600 percent growth in assets under management since 2000, and 50 percent growth above that of the wider global hedge fund industry. This surge of interest will be mimicked in the Middle East, according to Trust Securities research, along with a desire for transparency, security and understandability of ï¬nancial products.

Demand for greater risk/reward prompts high yield fund launch
THE Bank of London and the Middle East (BLME) has launched a high yield fund aimed at high net worth investors and institutions in the GCC. Launched under the ï¬rmâ€™s Shariah Umbrella Fund, it comes in response to demand for a product with a higher risk/reward proï¬le, according to the ï¬rm. BLME is targeting a net return of threemonth US Dollar Libor plus 5% per annum by investing up to 85% in Sukuk and 15% in Ijarah. The fund has seed capital of $10m. Minimum investment is $250,000 with sterling and euro share classes also available. Annual management charge is 1% with no initial fee.

Sedco launch
JEDDAH: Sedco Capital, a wealth management ï¬rm focused on ultra high net worth individuals, institutional investors and family ofï¬ces, has launched. Headquartered in Jeddah, Saudi Arabia, the ï¬rm is a member of SEDCO Holding Group, founded in 1976, which is owned by the Bin Mahfouz family. Sedco Capitalâ€™s portfolio includes public equity, private equity, international real estate, commodities, sukuk, and the development of income generating real estate. All of its business is conducted according to Shariah principles.
10 MENA FUND REVIEW JULY 2011

Innvative plans include football and lifetyle product launches
UNITED Investment Bank (UIB) is to launch four new funds, including a football fund, a lifestyle fund and two ï¬nance funds. The football fund was set to launch with $30m to $50m in assets under management, the lifestyle fund with around $65m and the ï¬nance funds with $10m to $25m, according to reports. The ï¬rm also intends to launch an aircraft engines leasing fund at some point in the future, with more than $150m in assets under management at inception. UIB, a subsidiary of Hong Kongâ€™s United Financial Partners, opened an ofï¬ce in the DIFC earlier this year. It intends to concentrate on opportunities in frontier and emerging markets and is looking at developing Shariah-compliant products.

NEW PRODUCTS SET TO FOLLOW MERGER
DUBAI: A Middle East subsidiary of Franklin Templeton

-

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NEWS

MSCI postpones UAE and Qatar upgrade decision to December
MSCI has postponed its decision on a potential upgrade of UAE and Qatar stock markets to emerging markets status for another six months. MSCI currently classiï¬es both the UAE and Qatar as frontier markets. Its decision to upgrade them to emerging market status was being watched closely by investors and asset managers as it could spark a wave of global asset managers entering local markets and potentially adding to the value of locally listed ï¬rms. MSCI will now make a decision in December this year, â€œin order to give additional time for market participants to assess recent enhancements implemented on the Qatari and Emirati markets.â€ It said speciï¬cally that the market required more time to assess the impact of the new delivery versus payment (DvP) models that were recently introduced. The index provider also cited stringent foreign ownership limits and limited availability of shares to foreign investors as issues of concern to international investors. The UAE allows up to 49 percent foreign ownership in its listed companies and Qatar allows just 25 percent. Under current conditions the MSCI Qatar Index would not qualify for emerging markets status, stated MSCI. â€œA potential reclassiï¬cation of the MSCI Qatar Index and MSCI UAE Index to emerging market status would be implemented in the MSCI Indices at the earliest as part of the November 2012 Semi Annual Index Review,â€ the index provider added.

rolls out new Shariah
SAUDI-BASED Sambacapital has launched a Shariah compliant equity fund called the Al-Ataa Saudi Equity Fund. The fund will be an openended, Saudi riyal denominated equity fund that is benchmarked against the S&P Saudi Arabia Shariah (Saudi riyal) Index. The fund will distribute a cash dividend of up to 2.5 percent every six months. It will charge an annual management fee of 1.75 percent, with redemption fees of 1.5 percent for the ï¬rst year, one percent for the second year, 0.5 percent for the third year and none thereafter. Sambacapital is the asset management division of Riyadh-based Samba Financial Group.

investors access to Asia
DUBAI Islamic Bank (DIB) has launched a fund aimed at giving Middle Eastern investors access to Asia. The Prudential Shariah Opportunities - Asia Paciï¬c Equity Fund, is focused on medium to long term capital appreciation by investing in Shariah-compliant companies within the Asia Paciï¬c region, excluding Japan. The fund, which is offered by Prudential Asset Management Limited, based in the DIFC, aims to capitalize on the rapidly growing economy and increasing wealth of the region It is benchmarked against the Dow Jones Islamic Market Asia Paciï¬c ex-Japan Index. Dr. Adnan Chilwan, deputy CEO - chief of consumer and wholesale banking, Dubai Islamic Bank, said: â€œThe Asia Paciï¬c region has emerged as an anchor for the global economic recovery and, driven by consumption and investment, is poised for further growth. This new product is in line with DIBâ€™s commitment to introduce pioneering, high quality ï¬nancial products. It is designed for our valued high net worth customers who understand the opportunities presented by the Asia Paciï¬c equities markets, and would like to capitalise on the same.â€ According to estimates by brokerage ï¬rm Credit Lyonnais Securities Asia, Asiaâ€™s rapidly expanding middle-class population is forecast to reach the one billion mark by 2015. Meanwhile, Asian consumer spending is estimated to grow from $4.3 trillion in 2008 to $32 trillion by 2030, representing about 43 percent of global consumption. The pace of urbanisation in Asia-Paciï¬c is unparalleled by any other region in the world. The United Nations estimates that the population of Asian cities is expected to increase from 1.8 billion in 2010 to 3.4 billion in 2050, creating massive infrastructure investment opportunities for the private sector.

THE University of British Columbia Endowment Plan, run by UBC IMANT, is set to make its ï¬rst emerging markets investment. The fund managerâ€™s primary target is 5 percent WWW.MENAFUNDREVIEW.COM

to emerging markets by September this year, and 10 percent as a longer-term aim. The endowment fund is worth around $950m and the pension plan $831m.

RUSSELL Investments may launch a raft of new funds before year-end. The ï¬rm is planning a second emerging markets fund and considering GCC and Saudi Arabia focused products. The companyâ€™s 14-year old Russell Emerging Markets Fund has reached capacity, with around $4bn in assets under management. The new emerging markets fund will combine global and regional mandates, with the aim of creating a more regional weighting, according to the ï¬rm. The news comes off the back of an announcement earlier this year of plans to expand into the MENA region, including investment into the regionâ€™s fund managers and the launch of a new index. The company hopes to open a MENA ofï¬ce, in Dubai, by September.
JULY 2011 MENA FUND REVIEW 11

SAUDI banks are among the most profitable and efï¬cient in the GCC, according to recent Standard & Poorâ€™s report Trends and Events Affecting Banks in the Gulf in 2011. This proï¬tability stems from a unique combination of factors. â€œThey operate in a supportive operating environment because of high oil prices and the backing of a cash-rich sovereign (Saudi Arabia; AA-/Stable/A-1+). They also beneï¬t from a protected franchise with high barriers to entry and a limited number of players: there are 12 commercial banks, with widely varying market positions, of which we rate eight. Saudi banks also beneï¬t from structural advantages regarding costs,â€ said Standard & Poorâ€™s credit analyst Nicolas Hardy. Their cost of funding is low because of the high portion of stable, unremunerated deposits, the report added, and efï¬ciency ratios are good because of the low cost of labor.

Cost of risk was well contained and banks had the ability to provide gradually for nonperforming loans provisions up to conservative levels, that is, up to 100 percent and higher,â€ said Hardy. â€œFinally, like in other GCC countries, banks do not pay business tax. So, in the end it explains why in Saudi Arabia we have seen very good and resilient proï¬tability indicators.â€ The report also discussed if and how Bahrain can regain its status as a ï¬nancial hub. â€œAs a rating agency itâ€™s not our role to give advice or to make recommendations about how a country can regain status or build up conï¬dence,â€ said Standard & Poorâ€™s credit analyst Emmanuel Volland. â€œObviously, a lot is related to investor conï¬dence. We think Bahrain was seen for a very long time as the center for wholesale banking in the Gulf, with a good infrastructure, good regulation, and track record.â€

There have been a few incidents in recent years with the failure of some wholesale banks, questions about regulatory oversight and most recently political unrest that have rocked this track record and â€œraised some question marksâ€ among the ï¬nancial community. â€œAt the same time we think we should not exaggerate about the effect of these incidents on the infrastructure and the the potential of Bahrain,â€ he said. â€œStandard & Poorâ€™s has no serious doubts that Bahrain is going to remain an important ï¬nancial centre in the GCC. However, we note that it was already under pressure from competition from Qatar and Dubai, which now have a good opportunity to take a more important role in the region.â€ If the political situation remains stable the Bahrain authorities should be able to convince investors of the countryâ€™s continued status as a key ï¬nancial centre for the region, he concluded.

Alliance to promote NCB Shariah products
TAKAFUL Emarat, a Shariah compliant life and health insurance company headquartered in the UAE, has formed a partnership with NCB Capital, Saudi Arabiaâ€™s largest investment bank. As part of the alliance, Takaful Emarat will offer its customers a range of 21 Shariah-compliant funds managed by NCB Capital. â€œOur partnership with NCB Capital, the largest investment bank in the Kingdom of Saudi Arabia, signiï¬es our dedication to bringing our customers a competitive selection of Shariah-compliant investment products. The synergy resulting from our new alliance with NCB Capital will ensure that our customers can access a range of investment products to meet their diverse needs,â€ said Ghassan Marrouche, general manager of Takaful Emarat.

Al-Beit fund performs well
QATAR: The Al-Beit Al-Mali Fund, managed by Global Investment House (Global), has recorded 5.3 percent return during the ï¬rst ï¬ve months of 2011, outperforming its benchmark by 4.4 percent and bringing the total returns since inception to 50.4 percent, a solid 44.3 percent above its benchmark, according to the ï¬rm. The Al-Beit Al-Mali Fund was launched in September 2006 by Investment House and aims to achieve medium to long-term capital appreciation by investing in Sharia-compliant companies listed on the Qatar Exchange. At the end of May 2011, the Fundâ€™s sector allocation was focused on ï¬nancials (35.6 percent), services (35.3 percent) and industrials (28.8 percent). Mohamed Sherif El-Raï¬e, the companyâ€™s general manager, said, â€œAl-Beit Al-Mali Fund has consistently outperformed its benchmark since its inception in 2006. In 2010, the fund recorded a return of 25.1 percent and distributed 7 percent cash dividends to investors.â€ Investment House was established in 2001 as a private shareholding company under complete supervision of Qatar Central Bank. The company provides a wide range of Shariah compliant investment products and services in investment banking, asset management, private equity and structured ï¬nance, and focuses on different economic sectors including ï¬nancial services, real estate and construction, manufacturing and the services sector.

THE MENA Investment management Forum, due to take place in Qatar on 2-5 October has attracted a range of major speakers. Attendees will hear Farah Foustok, CEO of ING IM Middle East, Tarek Sakka, CEO of Ajeej Capital and Christian Shomber, CIO of KMEFIC, among others. MENA Fund Review is among the media partners for the event. Copies of our next issue, which will include features on Islamic funds and EFTs as well as a legal issue roundtable, will be distributed at the event.

AMISLAMIC Funds Management, the Shariah-compliant investment subsidiary of Malaysiaâ€™s AmBank Group, has launched a new product called the AmASEAN Equity fund. The AmASEAN Equity fund follows on from the the launch of its Asia-Paciï¬c fund last month, The new fund targets medium- to long-term capital growth by investing in a portfolio of equities in the ASEAN markets, with a speciï¬c focus on Indonesia, Malaysia, Singapore, Philippines and Thailand. Mohamed Fauzi Mohamed Tahir, the companyâ€™s head of equities, said: â€œThese regions have a strong projected underlying growth. According to the IMF, the ASEAN-5â€™s projected growth of 5.1 percent will outperform developed markets such as the US (2.9 percent) and Europe (1.8 percent) in 2012.â€ The fund is denominated in ringgit, but can
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MARKET ANALYSIS
Egypt begins long road to recovery
THE PROSPECTS of short-term economic growth in Egypt have materialized and foreign ï¬rms are continuing to look remain low, although some foreign investors are taking at Egypt in a fairly favourable light. Swedenâ€™s Electrolux a positive view on the country and the stock market has announced in April it was reigniting plans to buy an Egyptian recovered a little on the back of investment, particularly from appliance maker and an unnamed Qatari group is in talks the Gulf. with the government to buy the chain store Omar Effendi, It will be a long way back for the country though. Its according to reports. stock market reopened on March 23 after being closed for However, this wonâ€™t be enough to see Egypt through difï¬cult almost seven weeks, just before it was due to be removed times ahead without a great deal of economic pain, according from MSCIâ€™s emerging market index. The EGX 100, Cairoâ€™s to observers. benchmark index, fell more than 20 percent in the run up to the revolution that eventually toppled the former president, Hosni Mubarak. Egyptâ€™s uncertain political future is not helping recovery. 1,000.000 Elections are slated for this autumn, but aside from the 900.000 Islamist movement and the Muslim Brotherhood, political parties are small and disorganised. 800.000 There has been sectarian violence and a rise in crime 700.000 since the uprising, as Egyptâ€™s economy shrank by around 600.000 seven percent in the ï¬rst quarter. According to the Institute for International Finance 500.000 gross domestic product is likely to shrink 2.5 percent for 400.000 all of 2011 and grow just 4.2 percent in 2012. That is far slower than Egypt requires in order to keep pace with 300.000 population growth and the need to create jobs. 200.000 In addition to this, ï¬nance minister Samir Radwan has 100.000 forecast a drop in foreign direct investment by 40 percent to $4.1bn in the 2010/11 ï¬scal year from the previous 0.000 year. Foreign investment already fell to $1.2bn in the ï¬rst quarter of the year, down by $400m from the same period 3/1/11 9/5/11 6/6/11 4/7/11 in 2010. 17/1/11 14/2/11 14/3/11 11/4/11 31/1/11 28/2/11 28/3/11 25/4/11 23/5/11 20/6/11 The capital ï¬‚ight that many feared does not appear to

Series1

Uncertainty lifted but questions remain
FOLLOWING months of political vacuum after the collapse of former prime minister Saad Haririâ€™s cabinet, Lebanese politicians formed a government in June, much to the marketâ€™s relief. Amid tense uncertainty business contracted by as much as 30 percent since the beginning of the crisis, according to reports, contrary to economic projections announced towards the end of last year that put the countryâ€™s GDP growth in 2011 at about six percent. The four-month power vacuum saw trade unions and civil groups protest against the politiciansâ€™ inability to form a government and subsequent decline in foreign investment and consumer conï¬dence. While the clouds of uncertainty have begun to clear, the formation of a government under prime minister Najib Mikati has raised questions among some observers. Nicholas Chammas, chief of the Beirut Traders Association, who threatened calls for a national strike during the political impasse, said it was not enough for a government to have been formed; it would now have to enact a concerted campaign for economic recovery in order to overcome the damage done to Lebanonâ€™s economy. See page 19 for more analysis of the Lebanon situation.
14 MENA FUND REVIEW JULY 2011
1,800.000 1,600.000 1,400.000 1,200.000 1,000.000 800.000 600.000 400.000 200.000 0.000

COLUMNISTâ€™S VIEW
Roll out the barrel
There are two things to learn from the International Energy Authorityâ€™s extraordinary decision last month to sell the world an extra 60 million barrels of crude in a bid to tame the raging oil price. Firstly, the governments behind the Parisbased organisation are clueless about the market. Secondly, there are a lot of clueless traders out there. Journalists were delighted with the IEA. Not only were they handed a breaking news story that wrote itself, but the market also obliged with a shuddering kneejerk reaction. â€œIEA one, OPEC nil, as oil plunges $5 a barrel,â€ read one headline. For years to come, salesmen at Reuters and Bloomberg will extol the benefits of real-time news with charts showing crude in free-fall the second the headline flashed onto the screen. Wiser and by now richer heads realised that 60 million barrels of crude is less than one per cent of the worldâ€™s daily intake. Just one airline group, Lufthansa, will consume the equivalent volume in jet fuel in a year. It was a lame attempt from the outset to manipulate the worldâ€™s largest commodity market, hobbled further when it emerged the extra supply was really 40 million barrels with the rest occurring through creative accounting in strategic reserves. Obviously the IEA would have known they were shooting an elephant with a water pistol, which begs the questions why bother? One target was OPEC after its refusal to increase official supply quotas, biting big brother Saudi Arabiaâ€™s guiding hand in the process. Another was the speculators, with the IEA firing a warning shot at those pesky bullish hedge funds. Whoever the target, the IEAâ€™s motivation was clear. High oil prices are a threat to global recovery, and can plunge the world back into recession. Of course, the IEA has claimed success, with the extra barrels apparently preventing a price spike in the third quarter, and helping to realign the balance between sweet and sour crudes after the former was depleted by Libyan civil war. But the indecent speed of the recovery in crude prices, with Brent regaining over $10 a barrel since the release started, and the continuing backwardation
Paddy Gourlay

(prompt prices more expensive than later ones) of the European futures curve makes the claim hollow. Global oil demand will hit 91 million barrels a day next year by the IEAâ€™s own projections, up 1.5 million from this year. There will be extra barrels available to meet the rise, but it is diminishing. It is a simple equation - more demand, less capacity, more chance of price spikes. That is why Goldman Sachs is so bullish crude. It just doesnâ€™t believe Saudi Arabia can man the pump. There is no doubt Saudi Arabia has and is taping into spare capacity. Last month, the kingdom pumped 9.7 million barrels of crude a day, the second highest level in three decades, amid claims it could increase production to 12.5 million barrels a day. But the worldâ€™s crude reservoir is also on course to consume an average 2.81 million barrels a day itself this year, up 5.6 percent on last year, making it the worldâ€™s sixth largest consumer behind the US, China, Japan, India and Russia. The extra oil Saudi Arabia is pumping out to supposedly meet the loss of Libyaâ€™s light sweet crude seems to be staying home instead. But there are more twists and turns than a simple tightening supply demand balance. Oil thirst is shifting east, leaving Europe with far too much refining capacity. The old majors have little interest in building more plants and are investing upstream instead. Once British BP now has no refining capacity in the UK while Total and Shell are also looking for the exit. The over capacity is so bad that Europeâ€™s refiners are running at under 80 percent and yet margins are only hovering around breakeven. Despite this, Europe is short jet fuel and needs to import around 1.5 million tonnes a month, mainly from the Arab Gulf and West Coast of India. As demand for flights continue to grow, and Europe sheds its loss making marginal refining plants, that short will get bigger. Europeâ€™s airlines, already burdened with a fuel bill that accounts for over 30 percent of total operating costs, face a bumpy ride. Even with more and more people flying, some airlines may crash and burn.

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JULY 2011 MENA FUND REVIEW 15

COUNTRY - EGYPT

COUNTRY FOCUS - EGYPT

A question of
Investors require a series of decisions to be made, mainly political ones, before returning to Egypt. MENA Fund Review spoke to Michel Chikhani, head of asset management at Blominvest Bank, about what it will take to restore confidence and his vision for the countryâ€™s future
IT TOOK just 18 days of street protests across Egypt to topple former president Hosni Mubarak, ending 30 years of autocratic rule with his resignation on February 11 this year. And a little more than a month later, on March 19, a set of constitutional amendments was overwhelmingly approved by referendum, paving the way for elections. Change has been remarkably rapid and peaceful in Egypt. But with the military still holding control and a new set of players now vying for political power, there will undoubtedly be bumps in the road ahead. Egypt suffered a severe economic blow as a result of the unrest that saw parts of Cairo brought to a standstill as anti and pro Mubarak supporters faced off with the military in between. Tourism, which contributes around 11 percent to the Egyptian economy, has dropped by 80 percent from pre-uprising levels. There has been capital ï¬‚ight out of the country and a complete drying up of new foreign investment. GDP growth, which was expected to be six to seven percent this year, has been revised down to between two and 2.5 percent. While Egypt has suffered a setback, there are many underlying factors that could help to drive growth if the country can shake off the uncertainty that
16 MENA FUND REVIEW JULY 2011

currently surrounds it. Egypt is the most populous country in the Arab world, with the Suez Canal running through it, oil reserves, a strategically advantageous geographical position and arguably unrivalled tourism potential, as well as a youthful population. In addition, it is in need of quite a severe upgrade of infrastructure, investment in which could provide a strong ï¬scal stimulus to the country in the coming decade. There are many positive factors in Egyptâ€™s favour, and some observers have gone so far as to say it could become the â€œnext Turkeyâ€. â€œBetting on a positive outlook for Egyptâ€™s equity market is the way to go,â€ according to Michel Chikhani, head of asset management at Blominvest Bank. â€œWhat matters for an investor is the next signiï¬cant move but for a portfolio manager his concern is about managing risk. These are the times where robust investment processes are tested. â€œInvestors and portfolio managers are always looking for opportunities and any signiï¬cant sell off in a market similar to the one we had in Egypt offers such an opportunity. However, the upside will not be regained following a severe sell-off unless positive and sustained upside momentum becomes the norm.â€ Chikhani is conï¬dent there will be not

one but a gradual ï¬‚ow of positive political messages that will fuel growth. Certain sectors of the Egyptian economy will be most likely to lead any recovery, including agriculture, healthcare, construction and building materials, transportation and logistics, all areas necessary to the development of infrastructure and improvement of peoplesâ€™ lives that any new government will need to build on in order to fulï¬l the unwritten contract with the people that life will improve now Hosni Mubarak has gone. The stimulus to building momentum may be improvement in these areas of the economy driving greater conï¬dence, demand and development in other areas of business. â€œThe EGX 30 index fell more than 20 percent in early March and the ï¬rst impact of the crisis was immediately factored in. Ever since, the index has been holding its March lows with limited sustained upside momentum as nimble technical trading always prevails during periods of high volatility especially when fueled by political uncertainties,â€ according to Chikhani. â€œConsequently, the market has been gyrating within a narrow but volatile band of some 10 percent. In a similar constrained climate, investors and portfolio managers leave high beta stocks and adopt a more
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COUNTRY

selective risk oriented approach, usually overweighing stocks that are resilient. Not all stocks present the same risk and some are looked at as buying opportunities. This can be seen in the performance of these resilient equities in maintaining the index above its March lows despite negative second quarter 2011 results.â€ Of course, building the momentum Chikhani talks about will require political decisions to be taken that are attractive to investors. Some observers have raised questions over the countryâ€™s future political direction, fearing a drive towards nationalisation that would scare the private sector away. This is unlikely to occur, according to Chikhani. It has been made clear in military statements that the private sector is fully protected, he says. Regarding regulatory changes, there might be some but the picture remains unsure. So what might be the next step towards turning momentum in a positive direction? Investors are watching progress by Egyptâ€™s military council towards elections, as well as its ability to restore security to the streets, according to Chikhani. They are also waiting for â€œclear messages that offer more comfortâ€ and for the outcome of â€œkey dates on the agendaâ€. â€œThe Egyptian equity market will continue to be monitored by investors, as the relative stability of the Egyptian currency and the depth of the equity market,

â€œ

What matters for an investor is

along with the soundness of many Egyptian companies, will certainly remunerate risk.â€ If a series of decisions are made that remove uncertainty, investors will begin to look more seriously at returning to Egypt, he believes. In the long-run the Egyptian uprising could prove beneï¬cial to Egyptâ€™s economy and investment environment, leading to improved competition and a more transparent environment with less corruption. However, there remains the risk of decisions being made that favour short-term populism over long-term growth and stability. Decisions made by Egyptâ€™s incom-

ing government early on will be crucial to convincing investors that its intentions are favourable to them. The new government must offer reassurances over a range of issues â€“ including security, demand, regulations, and ease of entry and exit â€“ in order to attract investors, according to Chikhani. Egyptâ€™s economy has not suffered as it might have if there had been a prolonged period of unrest. It is not broken but â€œfrozen,â€ he says. Investors have not left permanently, rather they are awaiting decisions, mainly political ones that will allow them to recontinue their investment in Egypt and possibly increase it.

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JULY 2011 MENA FUND REVIEW 17

GEOPOLITICS

GEOPOLTICAL ANALYSIS
Power vacuum emerging
A POWER vacuum is beginning to emerge in the Middle East, according to Reva Bhalla, director of analysis at global intelligence agency Stratfor. The US has taken its eye off much of the region, as it concentrates on domestic issues, options in Libya, relations with Pakistan and where to go with Afghanistan. That has left the door open for Iran to attempt to expand its inï¬‚uence. In Bahrain the situation is a lot calmer than it was three months ago, when Shiiteled protests threatened to lead to a proxy war in the country between Iran and Saudi Arabia. However, the Bahraini government continues to walk a â€œpolitical tightrope.â€ It organized a dialogue in early July, designed to show it was reaching out to opposition, while fresh Shiite-led protests were being organized across the country. The persistence of protests worries not only the Bahraini government, but also Saudi Arabia, which leads a GCC military force in the country. While there are legitimate Shiite-grievances, the Sunni royal families fear Iran using its covert assets to initiate larger uprisings that could undermine the authority of Sunni royal governments in the region Iran has demonstrated its sphere of inï¬‚uence and still has assets it could use to destabilize the region. Rumours are circulating that the GCC countries are drawing down their forces in Bahrain, claiming the situation is now calm enough to do so, according to Reva. Stratfor suspects this could be a concession by the Saudis to initiate dialogue with Iran. â€œWeâ€™ve seen over the past couple weeks in particular the Iranians putting out feelers for negotiations with the Saudis, and the reason for that is because the Iranians want to show its Arab adversaries that it can compel them into negotiations and those negotiations would be all about getting them to recognize the Iranian sphere of inï¬‚uence in exchange for Iran taking a step back and putting an end to, or at least a cessation to, its meddling in internal Arab affairs,â€ says Reva. Unrest is also continuing in Syria, although Stratfor does not believe the regime is in danger is collapse, because there are no serious splits in the countryâ€™s military. However, looking ahead, the Syrian regime faces more difï¬culties, with outside forces including Turkey, Saudi Arabia and the United States considering alternatives to the Assad regime.
18 MENA FUND REVIEW JULY 2011

Turkey wants to restore Sunni inï¬‚uence to the Levant region and this is likely to have an inï¬‚uence on the make-up of any replacement power in Syria. This is also a threat to Iran, which in order to maintain its foothold in the Levant relies upon Syria, through which it supports its main ally Hezbollah, in Lebanon. Turkey is emerging from its zero-problems with neighbours policy and beginning to look what inï¬‚uence it can exert within

the MENA region. Turkey is a natural counterbalance to Iran and one that the US is likely to rely increasingly upon as it withdraws from Iraq. The US might also enter into negotiations with Iran about the balance of power within the region as it exits from Iraq. That could alarm Saudi Arabia, and the possibility of this could be a reason why it has begun hinting at concessions in Bahrain as a way to preempt any Iranian-US deal.

EGYPTâ€™S MILITARY FACES ELECTION DILEMMA
The Egyptian military is currently faced with a dilemma. It wants to quit governing Egypt and go back to its old job of simply ruling it. In order to do this it has committed to holding democratic elections in the country. The question now is whether or not to hold them in September, as currently promised, or to postpone them towards a later date. There are two camps in Egyptian poliare the Islamists. The second camp are the pro-democracy youth activists, who organized most of the demonstrations in January and February. No matter what the military decides to do, it will risk upsetting one of these two camps. bly the Muslim Brotherhood, want the elections to be held as promised, in September. This is because the brotherhood is currently the most organized political force in Egypt. Despite this the brotherhood also wants to take things slow: it has vowed not to run for more than 49 percent of all the parliamentary seats in Egypt and it has also promised not to put forward a candidate for the presidency. However, the brotherhood still feels that the earlier the vote the better. have been allowed to form political tory, feel the same. This will give them an advantage when it comes time for rewriting Egyptâ€™s constitution after the elections are held. On the other side of this divide are the pro-democracy activists that organized most of the demonstrations in January and February. These people are collectively referred to at times as the January 25 Movement, but to call it a movement blurs the reality. They are highly divided, and there is no one group that has emerged over the others that would clearly garner a large number of seats in an election that would be held in September. So they argue that they need more time. This, they say, is the only way in which they can get more organized to effectively combat the Islamist forces running in the election. Thatâ€™s why one of their core demands is that the elections be postponed

post-Mubarak clashes with security forces in Tahrir Square in July and that led the push for regime change earlier this year. The military, unsurprisingly, is on edge because of this, especially in light of the fact that the January 25 Movement leaders are calling for a return to the sit-ins in Tahrir Square that we saw in January and February. Although there have been large demonstrations in Tahrir since the fall of Mubarak, the military is concerned that the January 25 Movement could organise fresh protests large enough to trigger a return to the instability that Egypt saw in the beginning part of 2011. Looking ahead, here is the Egyptian militaryâ€™s dilemma in a nutshell. If it holds the elections on time, it risks givspace at the expense of the more secular forces who say they need more time to organize. Or the military could use the instability in the streets as a pretext for delaying the elections, catering to the demands of those who are calling for regime change, yet who could create more competition for the Islamists. At this point itâ€™s not clear if the military has any clear strategy for how to deal with this issue.

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GEOPOLITICS

Incendiary politics
Lebanese politics feels like itâ€™s on a knife-edge, with the formation of a cabinet that strongly favours Hezbollah occurring just as four of that organisationâ€™s members are found guilty by an international tribunal of former prime minister Rafiq Haririâ€™s assasination. Alongside this, a variety of fractured internal groups split along religious and ethnic lines, combined with the interference of strong outside forces, add to the countryâ€™s volatile mix. MENA Fund Review talks to Reva Bhalla, director of analysis at global intelligence agency Stratfor, about the potential for unrest as a result of this cocktail of competing interests

FOLLOWING ï¬ve months of political impasse Lebanese Prime Minister Najib Mikati ï¬nally formed a 30-member cabinet in June. It was a move cheered by a section of the population, viewed with suspicion by some, and met with fear and anger by others. Although Mikati vowed to serve the needs of all the Lebanese people â€œwithout discrimination,â€ the make up of the cabinet is decidedly tilted towards the Hezbollah-led March 8 coalition, and has already sparked protest. Its creation comes off the back of Hezbollahâ€™s political maneuvering that toppled Lebanonâ€™s unity government in February, when the Syrian-backed organization, along with its allies, quit the cabinet after the former Western-backed prime minister Saad Hariri refused to convene ministers to discuss how to deal with the naming of suspects in the killing of his father The background to this was the assassination of Saad Haririâ€™s father Raï¬q Hariri in 2005, when a 1,700kg truck bomb killed him and 23 other people
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outside the St Georgeâ€™s Hotel and Yacht Club on Beirutâ€™s seafront road, the Corniche. Last year tension across Lebanon rose dramatically as an international tribunal into the killing began to near a conclusion, with members of Hezbollah expected to be named. At that time, Sheikh Naim Qassem, the Shiite militant groupâ€™s second-incommand, warned any charges against Hezbollah members would be â€œequivalent to lighting the fuse, to igniting the wick for an explosion.â€ The recent cabinet announcement was met with mixed reactions in Lebanon, a country split along numerous ethnic, political and religious lines. Accusing Mikati of discriminating against the Druze community and other minority groups, Arslan, a member of the March 8 coalition, tendered his resignation from the new cabinet. According to reports, the highway leading to the southern village of Khalde, Arslanâ€™s stronghold, was blocked by his supporters who also ï¬red rounds into the air in protest.

By contrast, the appointment of Faisal Karami, former prime minister Omar Karamiâ€™s son, as one of the new Sunni ministers in Mikatiâ€™s cabinet, was greeted with celebratory gunï¬re in his hometown of Tripoli. The new cabinet greatly favours members of the Syria-backed March 8 coalition and sidelines members of the Saudi-backed March 14 alliance. Hezbollah and its allies have eighteen seats of the total thirty. Former prime minister Saad al-Haririâ€™s March 14 alliance refused to join the cabinet, which given its composition, is likely to look for ways to thwart the search for justice for his fatherâ€™s death. It is a complicated situation, set against an even more complex history, and with a variety of intertwined players behind the scenes pulling strings and making deals. â€œThe ï¬rst rule to understanding anything about internal Lebanese politics is to walk away with the assumption that the Lebanese government itself doesnâ€™t really have direct authority over most of the affairs of the state,â€ according to
JULY 2011 MENA FUND REVIEW 19

GEOPOLITICS

Reva Bhalla, director of analysis at global intelligence agency Stratfor. â€œSo any Lebanese political machination is usually a product of external forces and thatâ€™s really just a function of the country itself. The fractures - ethnic, sectarian and political - in the country, they run so deep, and I think this cabinet is certainly representative of that.â€ Essentially, Lebanonâ€™s political scene is a battle between two factions â€“ the Hezbollah led and Syria-backed March 8 coalition and the Saudi-backed March 14 group, led by the former prime minister Saad Hariri. Within this there are various religious or ethnic factions such as Shia, Sunni, Druze and Maronite, aligning themselves with a particular side for their own reasons. â€œYouâ€™re constantly having different interests pulling at each other,â€ says Bhalla. Hezbollahâ€™s main aim at present is to deal with the ramiï¬cations of the international inquiry into Raï¬q Haririâ€™s assassination and strengthen itself while it holds a powerful hand in the government.

â€œInternally Hezbollah wants to make sure it has enough clout in the government to insulate itself, so when it comes to things like the special tribunal and the Hariri indictments and things like that they have enough of their loyalists in place to deï¬‚ect any meaningful action against them, and so far I think theyâ€™ve done a pretty efï¬cient job,â€ according to Bhalla. Essentially, Hezbollah, with Syrian backing, killed Raï¬q Hariri, and got away with it, she says. And they have since successfully managed to reduce the special tribunal into his killing to political theatre, with forces outside Lebanon playing it as a pressure tactic within the country. â€œInternally in Lebanon of course the feeling of vengeance is very legitimate,â€ she says. â€œBut in terms of fundamentally altering the political landscape in Lebanon I donâ€™t think the tribunal has that much effect. I donâ€™t think anybody wants to rock the boat too much in pushing these indictments against Hezbollah or Syria, and you can see that even in the Saudis restraint and others restraint

in pushing the special tribunal issue.â€ The Special Tribunal for Lebanon issued indictments for four members of Hezbollah at the beginning of July, a move which was immediately played down by interior minister Marwan Charbel who said it was, â€œjust an indictment, and not a ï¬nal verdict.â€ Hezbollah leader Sheik Hassan Nasrallahâ€™s resonse was less reserved: he threatened to â€œcut off the handâ€ of anyone who tried to arrest one of the organisationâ€™s members. Saad Hariri, by contrast, called the indictments a â€œhistoric momentâ€ for Lebanon. These reactions leave many waiting to see what the next step will be, according to Bhalla. â€œWill anything meaningful take place against these people, I doubt it,â€ she says. â€œHezbollah has been pretty good about deï¬‚ecting any sort of punishment and the Syrians have certainly helped in that regard. â€œI think Hezbollah has been worried every time that Syria has started to bargain with outside powers. Other pow-

ers are trying to get Syria to constrict Hezbollahâ€™s actions and there could be some sacriï¬cial lambs in Hezbollah that Syria could look at, so I think Hezbollah is also always wary of Syrian intentions as well.â€ Whatever the ï¬nal outcome, it is unlikely to fundamentally undermine Hezbollah as an organisation. The only real question, according to Bhalla, is does Hezbollah see the indictment as serious enough to take destabilising action, as they have done before? The last time the Lebanese government tried to take action against Hezbollahâ€™s communications network, in 2008, they launched a defacto coup and laid siege on Beirut. Any such action is a serious fear for Lebanon, as Hezbollahâ€™s power far outweighs that of the military. If Hezbollah feels threatened it could resort to its previous tactic of car bombing opponents. â€œLiterally in the summer following the Hariri assassination you had a whole string of car bombings,â€ says Bhalla. â€œIf you looked at it closely you could see the anti-Syrian factions being winnowed down one by one through these assassinations. Sadly thatâ€™s how Lebanese politics works. The potential for violence is always high. It is still very much a product of outside forces and although Syria is extremely distracted right now I donâ€™t think there is any question that its authority in Lebanon is still very strong.â€ While the tribunal brings with it the potential for unrest, outright violence is something Hezbollah would prefer to avoid. It is concentrated on maintaining cohesion as an organisation and making money. In addition, its patron, Syria, is embroiled in maintaining stability at home. The Syrian regime is unlikely to topple, according to Stratforâ€™s assessment of the situation there, but it is concentrated on more immediate issues than Lebanon, as well as subduing the interests of outside powers such as Turkey and Saudi Arabia, which have a long-term objective of restoring Syria to Sunni Muslim power. This long-term objective is both beneï¬cial and threatening for Syria and in turn for Hezbollah. It enables the Syrian regime to receive support from both Saudi Arabia and Iran, which could be particularly needed if unrest at home persists. However, it could also be a dangerous game in the long-term. â€œI donâ€™t see this playing out in the short-term as Hezbollah still has a lot of clout. They are a very organised force in Lebanon, the military doesnâ€™t dare to confront them, and they have plenty of their own agents in the security apparatus so they still have plenty of insulation
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for now,â€ according to Bhalla. Similarly, the potential for conï¬‚ict between Hezbollah and Israel looks unlikely in the short-term given the outside forces affecting Syria and Hezbollahâ€™s desire to consolidate its position of political strength. â€œThe potential is always there but I think Hezbollah is not interested in starting a conï¬‚ict with Israel,â€ says Bhalla. â€œAt this point in time I think Israel as well wants to see Hezbollah contained. They are much happier allowing the Saudis to try to pressure Syria to come back into the Arab fold and distance itself from Iran.â€ Hezbollahâ€™s primary objective right now is insulation, according to Stratforâ€™s observations. According to the organisation, outside forces, including Turkey and Saudi Arabia, are increasing their inï¬‚uence in the Levant region. The stronger these forces become the more capability they will have of undermining Hezbollahâ€™s position in Lebanon, and in turn undermining Syria and Iran. â€œHezbollah has learned, with the help of Syrian and Iranian intelligence over the years, how to ensure that they are in all the right places to make sure that when and if things get particularly intense down the line they, at least within the Lebanese structure, are not going to be severely threatened,â€ says Bhalla. Stratfor does not expect any major ï¬‚uctuations in the Lebanese situation in the next six months while Hezbollah looks ahead and plans for the future â€œYouâ€™re certainly going to see friction, youâ€™re going to see shifting alliances, and that is a very regular occurrence in Lebanon. It would be surprising if you didnâ€™t see that. But I think Syria is going to be able to maintain its inï¬‚uence in Lebanon for the foreseeable future and as Syria tries to recover its bandwidth at home it is going to try to show its neighbours that it still retains that ability in Lebanon so it is probably going to use its proxies there to assert its inï¬‚uence,â€ she adds. While Saudi Arabia has begun to play a more major role in the Levant region and has made attempts to win over Syria, it is overburdened dealing with events in other parts of the region at present and realises the limitations of any negotiations with Syria. According to Bhalla: â€œWhile the Saudis will certainly back their allies like Hariri and their Sunni allies, and make sure that they can maintain their strength as a counterbalance against Iranian inï¬‚uence and their proxies like Hezbollah, I still see it as very much a holding pattern. Lebanon isnâ€™t going to swing dramatically one way or another.â€

Reva Bhalla is Stratforâ€™s director of analysis and a senior analyst for the Middle East, South Asia and Latin America. Her work has been featured and cited in numerous publications including Al Jazeera, CNN, Blomberg, The Associated Press, The New York Times, Business Week and FOX News.

JULY 2011 MENA FUND REVIEW 21

FEATURE

FEATURES

Infrastructure on the rise
Long-term infrastructure development plans across the MENA region, aimed at meeting the needs of a rapidly growing and urbanizing population as well as diversifying economies, have received a shot of both instability and urgency as a result of recent unrest
INFRASTRUCTURE investment globally is huge business. There will be an estimated $41 trillion invested in infrastructure across the world by 2030 in order to meet expanding demand and modernize obsolete systems. The MENA region, with its rapidly expanding population and traditional underinvestment in infrastructure represents a serious chunk of this â€“ it is expected to account for 2.1 percent ($870bn) of total infrastructure investment. And with the Arab Spring pushing governments in the region to direct assets towards improving living conditions, this amount could well rise. Governments alone cannot support this level of funding and are in many cases encouraging private sector participation. The biggest infrastructure spending in the region is in Saudi Arabia, according to Fadi Al Said, senior investment manager, head of investments, ING Investment Management Middle East. The largest growth in infrastructure spending there is in education, he says, with new universities and schools being built and old facilities being revamped. There is also a large chunk going towards healthcare, water, power generation, defence and the countryâ€™s transport system, he adds. A similar pattern of investment can be seen across much of the MENA region, with a generally increasing budget being given over to infrastructure.
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There are several underlying factors that have been driving infrastructure investment in the Middle East and North Africa for some time. The strongest of these forces is demographics. There is simply a necessity to increase infrastructure spending to keep pace with a fast growing population and rapid urbanization. The MENA regionâ€™s population is relatively young and growing at almost 2 percent a year, according to Karim Moussa, managing director at EFG Hermes Private Equity. â€œThey need to continue to eat drink and drive and use infrastructure.â€ This need has been compounded by a severe lack of spending on infrastructure over the course of many years in every country in the region apart from Dubai. â€œThere has been signiï¬cant neglect in the past decades from the governments in the region,â€ he says. â€œNow they have realized that as populations grew and countries became more urbanized, that they have begun to lag behind and need to invest. We expect that Egypt alone over the next ï¬ve years needs investment of at least $45bn.â€ The main reason behind a lack of investors in the past has been a dearth of regional infrastructure investment opportunities, according to Al Said. â€œMost of the money was exported outside to be invested abroad,â€ he says. â€œNow with structural changes politically and economically, a lot of this money has come back. A lot of money has been generated

also from higher oil prices, especially after the ï¬rst Gulf War, which left countries like Saudi Arabia in debt, so they couldnâ€™t afford to invest. â€œWith the higher oil prices not only did they manage to pay down the debt, they actually realised they were underinvesting in infrastructure and they had to change that. â€œThis is not a ï¬scal stimulus, such as other countries are doing, it comes from a huge need, from a necessity.â€ Diversiï¬cation is another factor driving infrastructure investment. The Dubai model has been watched and is now being copied, with other countries in the region striving to develop themselves as ï¬nancial centres or to attract tourists. In addition, many countries are looking at how they can develop industries upstream of their existing strengths, such as oil. â€œWe are talking about a very young population, a huge need to create job opportunities, and a huge stress on the education system,â€ says Al Said. â€œTo be able to diversify your economy in addition to investing in education you have to invest in a lot of seed projects and to do that also you have to have a proper infrastructure.â€ The MENA region as a whole has passed the stage of mining basic materials, moved on to creating a strong infrastructure that can attract international companies, invested in technology and research, and is now at the stage of synergizing industries where it has relative advantages that it can
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FEATURE

easily evolve, according to Al Said. Most of these diversiï¬cation projects are now being pushed forward by Abu Dhabi, Saudi Arabia and Qatar, he adds. There has also been a refocusing of investment towards certain areas of infrastructure as governments in the region have begun to formulate long-term strategic plans to compete on the world stage. In Saudi Arabia for example, there has been long-term increased investment in education. â€œThe focus on education, the strategic need to create a labour force that can work, is something that was high on the agenda for the Saudi government,â€ says Al Said. What has been the effect of the Arab Spring on this tale of rising infrastructure investment? In the short-term, across much of the region, it is likely to have led to delayed or possibly cancelled projects. â€œThe short-term impact will be a delay in most government offered projects and more pressure on availability of foreign investors,â€ says Moussa. â€œI think there are a lot of foreign investors at the moment that are reluctant to deploy money because of the political risk associated. So what we are trying to do as an investment bank in the region is just to try to give them comfort.â€ According to Andy Thomson, senior editor of Infrastructure Investor magazine, it is early to draw conclusions. â€œPeople are obviously very concerned about the current situation in Libya, are unclear about the eventual outcome in Egypt and are not sure how Western and BRIC countries will respond to unfolding events in Syria,â€ he
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says. â€œBecause the region is in a state of ï¬‚ux, this naturally makes investors cautious. However, investors also know there is considerable merit in moving quickly into markets like these once there are signs of stability. Moreover, different investors have different attitudes â€“ many in Western Europe and North America have quite a conservative attitude to risk, while some in Asia have a larger appetite for risk.â€ He adds: â€œShort term, there is a lot of uncertainty and investors are working out how to position themselves. This means that the focus at present is on the more stable markets, predominantly those in the GCC.â€ In the longer-term, there is general consensus that the Arab Spring will prove to have had a positive effect on infrastructure investment, pushing governments to ramp up spending in order to fulï¬ll a moral code entered into with the people. â€œI think not only have some of these programmes been expanded, I actually think a lot have been put on a fast-track, because now there is the pressure of trying to build a better environment for people to live in,â€ says Al Said. â€œTo create more job opportunities you have to be able to spend and invest substantially, so the pressure is on now to do whatever can be done and get these projects over with and make sure they are ï¬nished in a timely manner.â€ In Saudi Arabia, this moral contract between people and government forced the authorities to initiate short-term infrastructure projects and social spending

alongside long-term projects that were already in place, he adds. In the short-term, many MENA markets will suffer as a result of the uncertainty caused by the Arab Spring. However, more stable markets, such as Dubai and Qatar, may proï¬t as investors seek out stable countries in the region. In the longer-term it will act as a stimulus to growth, according to observers, forcing governments to ramp up investment in infrastructure, and create new jobs and better living standards, in order to placate a restless public. â€œIt is very hard to say this is the kind of scenario that will happen long-term,â€ says Al Said. â€œBut looking at history, whenever a political transformation happens, especially in closed economies, in economies that suffered from a lack of transparency and visibility and a lot of corruption, usually the transformation phase is very volatile but in the long-term it has a very positive impact if it progresses in a democratic or a more open way. â€œAn example is the Eastern European countries and the huge growth in GDP per capita there after transformation from Communism to open economies. Look at other Asian economies and the kind of transformation that has happened. My guess if things work out ï¬ne, and I hope they will because its been less dramatic than a lot of these transformations in other areas of the world, I think the foundation and the base is there for a huge improvement locally in the economies of the region.â€ Opportunities will be strong in Saudi Arabia, by virtue of population size and wealth, combined with a need to improve infrastructure, he says. Qatar also looks a promising market for opportunities with huge investment plans in place and the positive impact of capital seeking safety there as a result of unrest elsewhere in the region. The latest estimates put infrastructure investment there in the region of $200 billion, according to Fadi. In addition, the World Cup 2022 will fuel plans to diversify the economy and potentially lead to a more transparent investment environment, he adds. The UAE is also a potentially high infrastructure investor, with a solid infrastructure base already in place and a desire to build upon it. Egypt could also prove a potentially lucrative market for infrastructure deals once political stability is restored. â€œI think it has the potential to become another Turkey,â€ says Al Said. The long-term impacts of the Arab Spring on infrastructure investment will be both direct and indirect, and this is how it is best played by investors, according to Al Said. â€œThe indirect impact is that this will creJULY 2011 MENA FUND REVIEW 23

FEATURE

ate some kind of stimulus to the economy,â€ he says. â€œIt will create activity in the banking sector, it will create activity on the economic front. This will increase the macro picture, increase economic prosperity and growth rates, which are usually highly correlated with performance of stock markets and to corporate proï¬tability, so this helps fund managers from a macro perspective.â€ In addition, Arab Spring inspired investment, and the investment already promised before unrest in the region, will have an impact on companies directly related to building infrastructure. This will include cable ï¬rms, building ï¬rms, companies providing building materials, and a host of other companies at various levels of the infrastructure development chain. â€œI think the right way to leverage the positive impact of infrastructure spending is to play the direct and indirect way,â€ says Al Said. This would include investing in companies across the development chain, as well as in the banking sector, which would beneï¬t from ï¬nancing deals. â€œIn addition, this will increase prosperity and GDP per capita, which will increase the buying power of consumers, so consumers related names will beneï¬t,â€ adds Al Said. â€œSo the best way to play infrastructure is to actually cover the overall story and all angles, not only to focus on speciï¬c names. â€œSome people will come with the hope of buying the best company in Saudi infrastructure, but these companies are project based and any delay for example could cause some disappointment.â€

Of course, while most observers anticipate a positive long-term impact across the MENA region, there remain risks to infrastructure investment there. Continued instability is a serious risk that investors should take into account. Events are still unfolding in the region, and could play out in a number of ways. Delays, accelerating inï¬‚ation and rising commodity prices could put stress on the budget for some infrastructure projects. Sustained lower oil prices might also reduce the budget for infrastructure spending, or alternatively cause governments to look increasingly to the private sector for funding. Governments need to work to attract investors and developers through concessions and guarantees, according to Moussa. Weak governments could cause a bottleneck of projects that are unable to proceed without strong backing or sufï¬cient stability to attract investors. They might also be swayed to take short-term political decisions that scare off investors. The Middle East and North Africa remains in a volatile state at present. While unrest appears to have died down, it remains a real possibility that it could rise again. In this environment decisions can be made for strategic political reasons that make little economic sense and certainly the needs of investors can be ignored. However, there are unstoppable longterm factors driving the need for infrastructure investment across the region and short-term events adding to the urgency for change. These could be the catalyst to a more prosperous region and greater investment opportunities in the coming decade.

Pressing need for water development
WATER infrastructure is beginning to emerge as an increasingly interesting opportunity for fund managers investing in the MENA region, according to Paul Farah, head of Middle East and Africa regions, Four Winds Capital Management. Modern lifestyles and rising populations have created a pressing need for improved water infrastructure in what is a largely arid region, and governments are turning to the private sector to provide it, he says. Traditionally, water has been taken for granted in much of the region, with the UAE either desalinating water at great expense or drawing it from the aquifer (a ï¬nite layer of underground water), and Saudi Arabia piping it across the country and dumping huge quantities in the desert outside Riyadh. Two decades ago this was not a problem, says Farah. Population numbers were
24 MENA FUND REVIEW JULY 2011

a fraction of what they are today. In the early 1980s Saudi Arabiaâ€™s population for example, was about six million, a quarter of the current ï¬gure. In addition to this, less water was used per head of population. Air conditioning, washing machines, constantly watered and manicured lawns, and a growing industrial base have all increased demands for water. This has resulted in the GCC countries becoming the highest per capita consumers of water in the world and led to a severe depletion of the aquifer layer together with a growing reliance on expensive desalinated water, which comes at the additional cost of high pollution levels. The water infrastructure situation has now reached a â€œcriticalâ€ level, according to Farah, and governments are beginning to react.

The GCC countries plan to invest $17bn in water and waste recycling and desalination over the next ï¬ve years, and the Saudi government has also been investing billions into water infrastructure projects. There is a â€œhuge pipelineâ€ of water projects in the planning stages across the GCC that have been made more accessible to investors by the ï¬nancial crisis as governments shift from self-ï¬nancing infrastructure development to using the private sector, so they can focus strained budgets on other areas, according to Farah. There is likely to be around $50bn to $75bn in infrastructure projects coming up in the next ï¬ve years and an ongoing pipeline of projects over the next 10 to 15 years, he says. In the longer term, the desire for better water infrastructure is also likely to spread across Africa, he adds.
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PROFILE

Ahead of the crowd
QATAR-BASED asset manager QInvest is optimistic and growing despite instability caused by the global ï¬nancial crisis and the Arab Spring. MENA Fund Review spoke to Anuj Khanna, head of investments, about the ï¬rmâ€™s philosophy and outlook. While much of the asset management industry looks on the current world and speciï¬cally MENA region economic situation with a degree of doom, Qatar based investment house QInvest is upbeat about investment prospects over the medium term. The ï¬rm, which launched in 2007 with $750 million in shareholder capital, continues to build out its platform and capabilities, deploying capital in a number of transactions and launching a range of Shariah-compliant products for clients over the past 12 months. The company has recently expanded its operations by establishing a presence in Turkey and Saudi Arabia. The company works across a variety of asset classes including credit, private equity, public equity, real estate and structured products and is looking to expand into hedge funds. QInvestâ€™s approach is to seed its investment products, and then take them to its investor clients in the region. This â€œdemonstrates our commitment and ensures an alignment of interest with our clientsâ€ says Anuj Khanna, head of investment management. The worst of the instability in the region appears to be past us and investment activity has picked up across many of our focus markets, he says. As the region returns to relative stability, risk taking will come back to the marketplace. â€œThe dislocation stemming from events in the past six months led to volatility and a mispricing of risk in the region. Such situations, if played correctly can represent attractive opportunities for those committed to the regionâ€, he says. â€œBeing a regional ï¬rm, people are aware of our long term commitment to the marketplace and that puts us in a good position to engage with counterparties on opportunities.â€ This understanding of the MENA reWWW.MENAFUNDREVIEW.COM

gionâ€™s dynamics has allowed QInvest to move in quickly where valuations are attractive relative to the underlying risk. Investors that wait for complete stability will likely miss these opportunities, according to Khanna. â€œYou have to look at opportunities now, and factor the risks in your pricing decisionsâ€ he says. â€œIf you wait for a complete resolution to the crisis you will probably be a little late to the party.â€ While QInvest sees opportunity, it is also very aware of the risks, according to Khanna. Investing across a wide range of asset classes, the company keeps a close eye on global issues that could affect its investments. Geopolitical risks remain a concern, and underlying business risks have been heightened by events in the region. Macro risks are also elevated as a result of the global ï¬nancial crisis and the continued challenges in Europe and the US. The recent ï¬nancial crisis has shown the MENA regionâ€™s interdependency with global markets. QInvest currently has a team of 150 people based in Qatar, looking at investment opportunities both across the MENA region and globally. The ï¬rm looks to add value by its understanding of MENA markets, by investing in businesses in the region that are keen expanding their operations beyond their core markets. Opportunities like these will continue to present themselves, according to Khanna, as the region emerges from the current instability and underlying economic drivers and entrepreneurial risk taking re-emerges. â€œThere appears to be greater awareness towards creating shared prosperity in the region through partnerships and risk-sharing,â€ he says. â€œThat will create opportunities.â€ Longer-term, the regional outlook remains strong given the rich resource base and prospects of the MENA region as an attractive market for multinationals given the demographics. This will lead to a rising level of intra-regional trade and capital ï¬‚ows. The asset management ï¬rms to beneï¬t from this will be those with the foresight to invest ahead of the crowd, and this is the essence of QInvestâ€™s strategy.

Anuj Khanna is responsible for investing QInvestâ€™s capital across various asset classes including: public equity, private equity, credit, and real estate. Prior to QInvest, he was cofounder and partner of the Yucaipa Global Partnership Fund, a private equity fund formed by former US president Bill Clinton and The Yucaipa Companies, where he played an integral role in all aspects of the fundâ€™s formation, fundtivities and portfolio management. Before Yucaipa, he spent 16 years in investment banking with CIBC World Markets, Deutsche Bank/Bankers Trust and Drexel Burnham Lambert. This was followed by several senior level assignments in nance and debt capital markets in Hong Kong, Singapore, London and New York. Khanna serves as QInvestâ€™s representative on the Boards of Intercat Hospitality Group, FIITJEE and on the Risk committee of Ambit Group, an Indian investment bank. He holds an MBA from the Wharton School of the University of Pennsylvania and is a member of the Clinton Global Initiative.

JULY 2011 MENA FUND REVIEW 25

FEATURE

The emerging new order
Trade between emerging markets has risen dramatically in the last twenty years as those countries have grown in economic strength and stability. The GCC is well placed both geographically and in terms of preparedness to capitalise on this growth. Intra-emerging market trade is in the coming years. MENA Fund Review speaks to Ayesha Sabavala, deputy editor of The Economist, Middle East and North Africa, about the GCCâ€™s place in the rise of intra-emerging market trade

ENORMOUS growth in emerging markets in recent years has now given rise to a new phenomenon of surging intraemerging market trade, according to a recent report produced by the Economist Intelligence Unit. Sustained economic growth in the GCC countries, driven in part by government spending, has fuelled intense interest in the region. It has also helped to sparkthe emergence of strengthening relationships between it and other parts of the developing world, particularly Asia, the EIU research, titled GCC trade and Investment Flows, The Emerging Market Surge, found. Thirty years ago the OECD accounted for almost 85 percent of all the GCCâ€™s trade. This began to change in the last 20 to 30 years with emerging markets becoming increasingly important to the region. By 2009 the emerging market share of GCC trade had reached 45 percent, rising at an average of 11 percent a year between 1980 and 2009, compared to just ï¬ve percent a year for the OECD. The growth in importance of emerging markets to GCC trade is a result of very high growth rates across developing countries, which has brought with it a rise in disposable income and increasing con26 MENA FUND REVIEW JULY 2011

sumption patterns, according to Ayesha Sabavala, deputy editor of The Economist - Middle East & North Africa. On the ï¬‚ip side of this has been a reduction in growth over the past few years in developed markets, which has added to the importance for emerging markets of ï¬nding new trade partners. Emerging markets are looking to each other both to ï¬ll this trade gap left by the developed world and because other emerging markets can provide products and services that the developed world cannot, or at least not at a similar price. China and India are the most important drivers of intra-emerging market demand with the GCC. China especially has experienced a shift from being a solely export oriented economy towards growing domestic demand. Another factor fuelling intra-emerging market trade is the GCCâ€™s drive to diversify its economy. It has a distinct advantage in doing this because of its location mid-way between East and West. â€œThey have been quite successful in taking advantage of their location at the centre of the world in capturing that increased ï¬‚ow of trade,â€ according to Sabavala. â€œThe investment in logistics during

the boom years means that the GCC is well placed now to take advantage of the increased trade. This is facilitated by Chinaâ€™s view of the GCC as primarily a logistics hub.â€ The GCCâ€™s solid infrastructure and geographical position leave the region ideally positioned to capture an even larger slice of intra-emerging market trade in the coming years. GCC countries will begin to increasingly push their comparative advantage in the petrochemicals industry, based on their existing strengths in hydrocarbons. Saudi Arabia and the UAE are already aggressively pursuing this route. The risk to this strategy of moving into downstream manufacturing is that it can be very energy intensive, according to Sabavala. Several GCC countries are facing gas shortages which could threaten the pace of such energy-intensive economic diversiï¬cation. â€œWe will see the demand for energy rising at a level that cannot match the basic supplies, speciï¬cally where gas is concerned. We see this as the main threat to diversiï¬cation. Thatâ€™s where the GCC is going to have to be cautious,â€ she says. Another risk for the regionâ€™s diversiï¬cation hopes is the lack of a clear plan.
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FEATURE

â€œThere isnâ€™t really a strategy,â€ according to Sabavala. â€œThere are lots of capital-intensive projects that have tons of money put into them, but we never hear of their completion. Many such projects are postposed or are on hold indeï¬nitely. They are adding to the ï¬nancial burden of the Gulf.â€ Of course, the GCC will not be acting as one uniï¬ed unit in trying to capture intraemerging market trade. The UAE was the ï¬rst to begin the process of diversiï¬cation and now others are following. Competition is likely to rise as countries in the region reach similar levels of infrastructure development and this could pose a threat to individual countries. There is a question mark over whether there will be enough demand for what the GCC has to offer and whether this competition will be healthy or damaging, according to Sabavala. There is also competition outside of the GCC. Singapore, for example, will remain a strong competitor as a regional ï¬nancial hub, which is something several GCC countries are pushing to become. â€œAt the moment, the Gulf is very well positioned but if they donâ€™t continue to stay competitive, business-friendly and build on the existing infrastructure then there could be a problem. There will be competition going forward,â€ she adds. Another threat to intra-emerging market trade is the instability found in emerging markets. While overall, they are safer than in the past, many developing countries still lack infrastructure, enforcement of the law, are plagued by corruption, or face the possibility of unrest. For example, the GCC is looking at trade with African countries for food security. This could create unrest and conï¬‚ict if the GCC begins relying on a country where the local inhabitants are themselves lacking food. â€œIt is a risky strategy, because we have seen what has happened in the Middle East and North Africa region in terms of the protests,â€ says Sabavala. The Arab Spring has beneï¬ted the GCC, with the exception of Bahrain, where the situation remains uncertain. Qatar and the UAE, in particular, are better off as oil prices remain above $100 a barrel, according to Sabavala. â€œIn terms of the UAE and Qatar, if anything the Arab Spring has portrayed them as the safer investment option,â€ she says. The population dynamics of the UAE, where more than 80 percent of the population are expatriates, means it is regarded as unlikely to experience severe unrest, although there have been some signs of dissatisfaction from the poorer northern emirates and calls for direct elections onto the national council, according to
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At the moment the Gulf is very well positioned but if they do not continue to stay competitive and wth good infrastructure then there could
Sabavala. The government has countered this by pumping money into the northern emirates. The GCCâ€™s main emerging market trading partner looking ahead is likely to be China, according to Sabavala. â€œHaving talked to a lot of businesses operating in the GCC I think in terms of trade it will be China that will win out over India because of Chinaâ€™s manufacturing prowess,â€ she says. â€œThe proportion of manufacturing as a percentage of GDP is much stronger in China. In India services are a greater contributor to GDP. â€œIn India you also have other restrictions such as the lack of infrastructure. Youâ€™ve got very high levels of inï¬‚ation. There are problems with China as well but the people that we spoke to seemed to think that there were much larger problems in India.â€ Malaysia and other Islamic countries in Asia could become increasingly important trading partners if Shariah ï¬nance grows signiï¬cantly, she adds. However, there could also be competition with Malaysia to be a global Shariah ï¬nance hub. As economic ties grow, so too will political and security relationships. There have been reports recently of a Chinese ship patrolling the MENA region and of an Indian naval ship offering to accompany an Omani vessel into port as protection against pirates. These are signs of growing cooperation that goes beyond economics. The diversiï¬cation of intra-emerging market trade between the GCC and other nations will in turn result in a diversiï¬cation of relationships, says Sabavala. This does not necessarily mean a worsening of either economic or political ties to the OECD or a lessening of opportunities for fund managers in those relationships. It will however undoubtedly result in new investment opportunities opening up that are connected to the growing intraemerging market surge.

â€œ

Ayesha Sabavala, deputy editor of The Economist - Middle East and North Africa

JULY 2011 MENA FUND REVIEW 27

FEATURE

The social media revolution
The use of social media during unrest across the MENA region and consequent realisation of its popularity and power have sparked a growth spurt in telecommunications that could lead to new opportunities for asset managers
THE USE of social media platforms, such as Twitter and Facebook, to galvanize and organize protest in the Middle East and North Africa in recent months is unprecedented. Its effect in Egypt was so profound that the uprising there was labeled the â€œTwitter Revolutionâ€ in some circles. Other technology, such as mobile phones and Youtube, were used to relay images and information to the rest of the world. Despite subsequent restrictions imposed by some governments in the region, these events will lead to an acceleration in the take up of broadband services as a relatively young population joins the technology revolution, according to research conducted by Martin Mabutt of Nomuraâ€™s equity research team. Nomura, an investment bank and global ï¬nancial services group, found already rapid growth in the use of social media across the Middle East and North Africa in recent years. â€œIt is one of the fastest growing regions for subscribers to social networking sites such as Facebook and Twitter, a trend that is only set to increase now that more social media platforms are releasing Arabic versions,â€ according to the research. The growth of broadband, driven by this social media phenomenon, which has been accelerated by the sudden realization of its power and inï¬‚uence, is likely to act as a catalyst to growth and
28 MENA FUND REVIEW JULY 2011

opportunities in the telecommunications sector. Nomura is bullish about the sectorâ€™s expansion, predicting data revenue growth of around 20 percent per year. Recent events across the MENA region have thrown the spotlight onto social media in particular. At ï¬rst glance, the picture of Facebook penetration and unrest would suggest that social media has had little impact on levels of unrest. â€œBahrain and Tunisia, both of which saw unrest, had high levels of Facebook penetration. Egypt, Algeria and Libya, in contrast, had low levels of Facebook penetration even though there were high levels of unrest,â€ according to Nomuraâ€™s research. â€œThis would suggest that Facebook was not a crucial factor in the organisation of the protest movement among the wider population, at least in those countries with low penetration.â€ However, the research goes on to point out that shortly after unrest began across the region - around mid-December, when events began to unfold in Tunisia â€“ there was a noticeable rise in the number of Facebook users in Tunisia, Egypt, Algeria and Libya compared with other countries that either showed a slight decline or no change. â€œThis may reï¬‚ect Facebookâ€™s use as an organisational tool, at least among those already online, and as an increasingly useful resource for distributing and receiving information as more people

logged in and joined up to gain access to information of unfolding events,â€ according to Nomura. The use of social media in the Middle East and North Africa had already seen high levels of growth in recent years before the recent unrest and its popularity is likely to continue to expand, according to Nomura. â€œWhile Facebook penetration (as the most popular social networking site Facebook usage can provide an insightful indicator of social media uptake) for the entire MENA region is still relatively low at about 5.5 percent of the population, or 18.5 percent of Internet users, that number is set to increase. Already the GCC countries have some of the highest Facebook penetration rates in the world. UAE, Qatar and Bahrain for example have higher Facebook penetration than the UK. Facebook has an estimated 15 million users in the Arab region.â€ Twitter now has around 5.5 million users in the region, up from an estimated 15,000-40,000 in 2009/10. In addition, Facebook and Youtube rank consistently in the top-ï¬ve websites visited for the region and more often than not are in the top three. Twitter, while not as highly ranked, is usually the most popular blogrelated site. Globally, social media now accounts for 25 percent of all Internet trafï¬c, a demonstration of its rapidly expanding
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FEATURE

draw. â€œWith the increase in Internet penetration predicted for the region, particularly in countries with high growth potential such as Egypt and Saudi Arabia, which have relatively low penetration and large populations, the role of social media will become more important as it cements itself as the central activity of internet users as well as an important tool for communication,â€ according to Nomura. Some governmentâ€™s in the MENA region have cracked-down on the Internet in recent months in an attempt to stem the ï¬‚ow of information about protests. In Egypt and Libya, the government shut down the Internet altogether. Across much of the MENA region, there are also stringent Internet restrictions. â€œHow authoritarian states deal with the rise of social media will be signiï¬cant to how social media develops and how it is used,â€ says the Nomura report. â€œWe might expect that those states with highly authoritarian regimes would be most likely to restrict use of social media and networks,â€ it continues. â€œHowever, the reverse seems to be the case. Those regimes that ï¬lter most pervasively in fact have the highest rates of social media and network penetration. UAE, Bahrain, Qatar, Kuwait and Saudi Arabia score the highest in terms of ï¬ltering indices yet have the highest penetration of social media. Egypt, Algeria and Libya, in contrast, all of which have/ had authoritarian governments had low levels of Internet ï¬ltering.â€ Currently, MENA-region states can exercise Internet control fairly easily because of the systems infrastructure and the regulatory framework governing connectivity. â€œIn most MENA countries there are relatively few ISPs that act as international gateways and they are all licensed on the agreement that they agree to the ï¬ltering policies of the respective governments. There are also fewer physical portals to connect to the international network, the control over which is important in terms of connectivity. In this regard, ï¬ltering, or shutting down the Internet wholesale, becomes a relatively simple process,â€ says Nomura. â€œThis is a situation that in the US for example, with multiple points of connectivity, as well as a raft of different private ISPs, and a lack of direct regulation, would be almost impossible. Consequently, we would expect that as Web 2.0 technology proliferates, there will be increasing regulation in the ISP market, in order to control Internet content and activity, and increasing sophistication in terms of monitoring processes.â€ There is a trend for greater control over the Internet and this is deï¬nitely
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â€œ
the case in the MENA region. For example, the UAE has demanded the installation of local servers by companies such as Google, Skype and Research in Motion (creator of the Blackberry) in order to monitor cross-border and internal communication. This trend means it may be more useful to talk about individual country webs, such as the Saudi wide web, or the Qatari wide web, rather than the World Wide Web. However, there are strong incentives not to ï¬lter or monitor too strongly, according to Nomura, as this could stiï¬‚e technological development. â€œAll MENA countries have developed economic and social strategies based around increasing Internet and broadband usage in their respective countries, however, the GCC takes the lead in this respect,â€ according to the report. â€œThe UAE, Jordan and Saudi Arabia in particular have become centres for Internet technology companies, in large part because of encouragement and incentives from the state. For example, Dubai Internet City and Dubai Media City were created to be a hub for online and digital media innovation. Almost all countries have concerted projects aimed at increasing broadband penetration as well as digitising government services. Advanced and dynamic Internet and connectivity is central to this functioning. Overzealous ï¬ltering of sites that are at the forefront of online innovation may well contradict these aims and discourage innovation and investment.â€ Social media has seen rapid growth across the MENA region over the past two to three years and this is set to continue, according to Nomura. â€œThe young, IT-savvy populations, high potential for growth in Internet penetration and the dominance of social media in the online experience are set to sustain this growth,â€ according the research. This points towards strong potential for growing opportunities in the telecommunications sector in the coming years.

Martin Mabutt, telecommunications analyst and author of Nomuraâ€™s report into the role social media has played in unrest across the MENA region

UCITS and Global Distribution Strategies The Luxembourg business model is its own success story, but it is above all the success story of a truly European idea: the creation of a single market for investment funds for which the legal framework celebrated its 25th anniversary last December. UCITS (Undertakings for Collective Investment in Transferable Securities) were introduced in 1985 by a European directive. Originally designed as a retail product, they are now widely sold to corporate and institutional investors as well as to the public. Under the UCITS framework, a fund domiciled in one European country can obtain a â€œdistribution passportâ€ that makes it easy to register for sale to investors in all other EU markets. Over the years, UCITS has become a strong global brand and funds are now widely accepted in non-European jurisdictions. Luxem30 MENA FUND REVIEW JULY 2011

bourg-domiciled investment structures are distributed in more than 65 countries around the globe, with a particular focus on Europe, Asia, Latin America and the Middle East. As a result, an increasing number of asset managers are establishing UCITS funds with a clearly deï¬ned global distribution strategy. Today, promoters from more than 40 different countries have made Luxembourg their hub for distributing funds globally. The number of MENA-based managers launching funds in Luxembourg has increased over the last few years and is set to intensify in the coming months with a number of projects now in the pipeline. There are two main drivers behind this recent interest in Luxembourg. The ï¬rst is that several MENA actors have reached a certain size and want to expand internationally. Having a UCITS product can help them extend their investor base and penetrate new markets. The second rea-

son is the demand for transparency and increased investor protection which resulted from the ï¬nancial crisis. The trend in the ï¬nancial sector is now towards high quality regulation. This is what an increasing number of investors expect and what the Grand-Duchy has to offer. Indeed, a trend for relocating off-shore funds on-shore has been observed over the past three years and the Luxembourg ï¬nancial centre has been among the clear beneï¬ciaries of such fund migrations. At this stage, the majority of MENA based actors launching funds in Luxembourg are not setting up UCITS but rather specialised investment funds (SIFs), a regulated fund vehicle that is extremely ï¬‚exible in terms of structure and investment policy. The introduction of the SIF legislation four years ago paved the way for a new generation of alternative investment funds targeting a qualiï¬ed investor base and over 1,200 SIF funds have been
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LUXEMBOURG

launched since 2007. The SIF framework is especially well adapted to the needs of sophisticated investors. AIFM Directive Europeâ€™s answer to the decision of the G20 that there should be no unregulated managers or products in the market place is a new Directive, ï¬nalised in November 2010, called the Alternative Investment Fund Managers Directive, or AIFMD. This Directive is designed to regulate all funds that are not compliant with UCITS rules, such as real estate, private equity and hedge funds. The good news is that these funds will then also be granted a European passport and that this passport will also, at a later stage, be available to non-European managers and funds that comply with comparable regulation. The passport will initially be accessible only to EU alternative investment fund managers (AIFM) managing and distributing EU domiciled AIF within the European Union. After a period of four years after the entry into force of the Directive, i.e. not before 2015, and dependent upon an additional decision by EU Institutions (the European Securities and Markets Association-ESMA and the EU Commission), non-EU funds and managers may also beneï¬t from the passport if they comply with all the provisions of the Directive. During this period of four years and up to 2018, existing national private placement rules (with a few additional AIFMD requirements) will continue to apply to funds being marketed in the EU without a passport. Between 2015 and 2018, non-EU funds and managers will have the possibility either of beneï¬tting from the passport, if they comply with the requirements of the Directive, or distributing without the passport, on the basis of national private placement rules. In 2018, three years after the granting of the passport to non-EU AIF and non-EU AIFM, the Commission will, on the basis of an opinion of ESMA, decide on the termination of national private placement regimes. This Directive will therefore have a direct impact on the international development strategies of alternative fund managers from the MENA region. Shariah compliant funds Another driving force behind the interest of Middle Eastern players for Luxembourg is the countryâ€™s growing recognition in the Islamic Finance world. Luxembourg is currently the leading shariah compliant fund domicile in Europe and ranks ï¬fth in the world with around
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40 funds. Shariah-compliant investment funds are a natural development given Luxembourgâ€™s strengths in conventional investment funds. While the choice of regime will depend upon the investment strategy selected and the investor base targeted, most shariahcompliant funds launched in Luxembourg are structured either as UCITS or as SIF. A number of shariah-compliant funds have adopted the UCITS structure, which is well suited to the principles underlying Islamic ï¬nance: since UCITS funds are primarily for retail investors, the main concern is safety, and funds have rigorous investment policies that accommodate the prohibition of gharar (uncertainty). UCITS funds are especially well adapted to Islamic fund promoters looking to target retail or institutional investors around the world. By contrast, the SIF structure is often used for shariah compliant real estate and private equity funds. The list of fund promoters that have launched shariah-compliant vehicles in Luxembourg shows that big international names in conventional investment funds were quick to climb aboard. In most cases, they already had a traditional range domiciled in Luxembourg and simply added on a shariah-compliant fund. Similar to what is happening in the conventional funds world, smaller players from the Middle East have also recently started to set up Islamic funds in Luxembourg. They usually already operate funds in their home countries for domestic investors, but have difï¬culty selling these in other countries. For them, Luxembourgâ€™s international reach has deï¬nite appeal. Luxembourg is not a newcomer in the world of Islamic ï¬nance. Islamic ï¬nance

ï¬rst appeared in the Grand-Duchy in 1978 with the arrival of the Islamic Banking System International Holding SA, the ï¬rst Islamic ï¬nance institution to set up in a western country. Five years later, the ï¬rst shariah-compliant insurance company in Europe was established in Luxembourg and, in 2002, Luxembourg was the ï¬rst European stock exchange to list a sukuk. But while these ï¬rst Islamic ï¬nance activities date back three decades, the pace has picked up sharply in the past few years, reï¬‚ecting the commitment of both the authorities and stakeholders in the ï¬nancial sector to developing these activities in Luxembourg. In 2008, the government set up a task force to identify obstacles to the development of Islamic ï¬nance and suggest ways to promote its growth. This led to research into assets eligible for shariahcompliant UCITS funds, the development of best-practice guidelines for ï¬nancial services in this area and a review of the tax treatment of shariah-compliant vehicles, all conducted by a dedicated working group within ALFI, the representative body of the fund industry. The working group reported back favourably, noting that Luxembourg was able to offer a range of vehicles addressing the speciï¬c needs of both investors and promoters interested in shariah-compliant investment

â€œ

MENA actors have only recently discovered the advantages of setting up their funds in Luxembourgâ€
dition, ALFI set-up its ï¬rst working group located outside of Luxembourg, in Dubai, in 2009. This group gathers together both Luxembourg expatriates and local players and discusses ways to improve the attractiveness of Luxembourg for MENA players both in the conventional and Islamic ï¬nance spheres. MENA actors have only recently discovered the advantages of setting up their funds in Luxembourg. However, with its well-adapted regulatory and tax framework, global distribution expertise and strong commitment from both the authorities and the private sector to attract more players from the region, there will certainly be interesting developments in the near future.

with no need for speciï¬c additional legislation. Then, in January 2010, the Luxembourg direct tax authority published a circular on Islamic ï¬nance, clarifying the tax treatment of murabaha contracts and sukuk transactions. This was followed, in June 2010, by a circular from the indirect tax authority clarifying the treatment of murabaha and ijara contracts. Having a suitable regulatory framework for Islamic ï¬nance business is one thing; you must also let people know about it. Representative bodies in the ï¬nancial sector â€” among them ALFI and Luxembourg for Finance â€” have thus increased their presence in key countries by taking part in major industry events and organising regular trade missions. In ad-

Opportunities and challenges
never been greater. However, in addition to promoting the advantages, Luxembourg also needs to be aware of what must be done in order to fully meet the speciï¬c needs of MENA managers: application of anti-money laundering laws, working to the Islamic calendar and understanding a relationship driven working culture. AML is arguably the most signiï¬cant of these challenges. While the GCC as an organisation is an FATF member, none of the member countries individually is. This means enhanced due diligence is required for GCC based managers setting up Luxembourg structures, drilling down through many layers of ownership of various entities comprising the structure to the ultimate beneï¬cial owner(s). Some managers have overcome this challenge by having a mother company, a ï¬nancial institution domiciled in an EU country. If signiï¬cant funds are to be launched by GCC based managers, a more pragmatic and risk based approach becomes necessary. The ALFI Middle Eastern and Islamic Finance Working Group, alongside LuxembourgForFinance has highlighted the situation and discussions are taking place on solutions acceptable to managers and their investors, as well as authorities and service providers. It can also be essential for MENA managers to follow the Islamic calendar and be able to invest, divest and provide valuations on all working days in the region. Service providers in Luxembourg working to the Gregorian calendar need therefore to adjust their operating models allowing MENA managers and investors to use Luxembourg fund vehicles in the same manner they would use local structure Finally, another key factor to successful business with MENA is relationships. Luxembourg providers are realising the importance of forging strong business relationships in the region, aiming to create a true partnership between provider and manager. Increasingly, Luxembourg industry professionals are pro-active with a growing presence based in the region, enabling them to forge a sense of trust and understanding on the ground. This, along with increased awareness and action on the other key points, means that the future for Luxembourg and MENA should see even stronger ties. By Germain Birgen, global head of fund solutions, HSBC Securities.
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THANKS to the persistent work of Luxembourg based providers and industry bodies such as ALFI and LuxembourgForFinance, awareness in the MENA region of what Luxembourg has to offer has
32 MENA FUND REVIEW JULY 2011

PROFILE

Following a different pathway
APEX Fund Services has grown in business volume, reputation and physical presence in the MENA region despite the global ï¬nancial crisis. MENA Fund Review talked to managing director Nicholas Angio to ï¬nd out how the company has succeeded and what it plans next Apex has been a ï¬xture in the DIFC since 2006, and a frontrunner in terms of providing fund administration services to Middle East and North Africa asset managers. The ï¬rm has continued to grow its business throughout the global ï¬nancial crisis and now plans further expansion in the coming months with the launch of an ofï¬ce in Riyadh on the cards. According to Nicolas Angio, managing director at Apex Fund Services Dubai & Bahrain, the success of Apex has been down to following a different path to most of its competitors. Most fund administrators have chosen to focus on reducing costs by centralizing functions in locations such as Ireland or India, he says, while Apex has gone in the opposite direction by maintaining fully operational teams in each of its locations to better service local clients by being in the same time zones, speaking the local language and adapting reporting to local linguistic preferences. â€œBeing a privately owned company, Apex has a long term vision of what fund administration should be and can implement that vision without the short term pressures that a public company would haveâ€ he told MENA Fund Review. â€œOur business model is different and thatâ€™s what has helped our business grow locally and globally. While others were commoditizing the fund administration service, we have focused on tailoring our services to each fund manager and to each region. And the most important part of that is that we serve all our clients locally.â€ The result of this policy has been a gradual expansion of the ï¬rmâ€™s presence across the region, with a ï¬rst ofï¬ce in Dubai followed by a second in Bahrain. Now a third ofï¬ce is in the process of opening in Abu Dhabi and another is planned for Saudi Arabia in the next three to six months. The local presence of Apex allows the organization and its staff to form partnerships with its clients and help them grow their businesses, according to Angio. â€œThe â€˜one size ï¬ts allâ€™ approach does not work in MENA for many reasons,â€ he says. â€œAnyone who has worked in the region is very aware of that. â€œWhen youâ€™re dealing with various local brokers, various local exchanges, Arabic speaking investors, Shariah compliant products and different fund regulations in each of the GCC countries, only a fund administrator that is on the ground
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and fully understands all those aspects can efï¬ciently service a fund structure in the region. We interact with a large number of counterparties on a daily basis and act as a central coordinator in addition to the Nicholas Angio typical fund administration roles you would expect. The beneï¬t of having local operations is very clear in the Middle East and North Africa as these markets are diverse, relatively young and quickly changing. â€œI think thatâ€™s been the main differentiating factor that has allowed Apex to grow where other fund administrators havenâ€™t broken into the MENA market as well as we have,â€ says Angio. The economic crisis has had a signiï¬cant impact on the way business is conducted across the region, and being a privately owned company has allowed Apex to adapt quickly to these changes, according to Angio. We are seeing managers innovate, trying out new strategies and focusing on nontraditional markets. Fund managers are running smaller teams and smaller funds. Cost reductions have made managers focus on their core while relying more on their administrator to cover back ofï¬ce capabilities, he says. Apex has reacted by launching a sister company called Apex MOOR Solutions Ltd (AMS), that will speciï¬cally take on these middle and back ofï¬ce functions from investment management companies. The short-term prospects for the region are dependant on global markets. Any further ï¬nancial crisis could have signiï¬cant implications locally where the regionâ€™s conservative investors have only recently started getting their toes wet again and allocating to fund managers. However, prospects for the MENA regionâ€™s asset management industry are good in the long-term, according to Angio. The ï¬nancial crisis has had a cleaning up effect, forcing weak players out of the game and leaving the stronger ones standing, he says. It has forced fund managers to focus more on risk management and to learn how global ï¬nancial shocks might affect their business. In addition, it has prompted investors to demand more transparency from fund managers and more control over their assets. This has accelerated the trend or the movement from funds towards managed account platforms. Demand has also increased for daily NAV calculations and independent valuations. Although the industry is seeing assets under management

increasing modestly, raising capital across the board still remains a difï¬cult exercise. To help managers launch new products in this challenging environment, Apex has put in place a number of fund platforms in Europe and offshore, including a Shariah compliant platform in Luxembourg, that ease the ï¬nancial burden by making the cost of launching signiï¬cantly cheaper, says Angio. Governments reacted to the ï¬nancial crisis slowly, but some changes are afoot and competition between countries to establish themselves as the dominant ï¬nancial hub will drive this further. â€œI think the region needs this competition to progress to the next level,â€ says Angio. â€œIn that sense, although itâ€™s not an efï¬cient setup to have all of these competing ï¬nancial centers at the moment, it is a step in the right direction for future consolidation which will have to happen if the region is to develop into a mature market capable of competing at a global level.â€ Demographic factors also look positive for industry growth as infrastructure development to meet the needs of an expanding and young population supplies an increasing ï¬‚ow of investment opportunities and creates a larger retail investment market, he adds. Geographically, the region is also well placed to capture a larger slice of the international ï¬nance market. â€œA client who recently relocated to the Middle East stated that one signiï¬cant factor for choosing the region to establish its organization was that you have access to Asian markets in the morning, European markets during mid-day, and then you can trade US markets at the end of your day. That is not as easy to do sitting in London or New York,â€ he says. Apex intends to capitalize on these longterm changes through its commitment to the MENA region, combined with leveraging its similar on-the-ground story in Apexâ€™s other 21 ofï¬ces around the world. â€œAt the moment we have just over 25 staff in the MENA region,â€ says Angio. â€œI expect that to go up to 60 staff in the next two or three years. In the longer run, in this region, I expect that investors and investment managers will turn their eyes towards the East and will be looking to allocate signiï¬cantly into China, India and Russia. These are all places where we have operations on the ground and can help our clients structure personalized investment products. â€œWe can leverage the Apex Global Network to help local managers by advising them on how best to access these markets. By having operational people on the ground there we have a full network of contacts that we can open up to our clients.â€
JULY 2011 MENA FUND REVIEW 33

TECHNOLOGY

Technology roundtable

Tech key to growth in maturing market
As Middle East and North African markets grow in maturity technology offers a significant advantage to asset management firms prepared to invest in it. MENA Fund Review spoke to three of the leading investment technology firms about the latest developments and the potential for greater technology uptake in the MENA region

TECHNOLOGY has been a neglected area of business operations across the youthful MENA asset management industry, but a growing maturity and more stringent regulatory frameworks are beginning to change this situation. New regulations, both international (such as the Dodd-Frank Act) and local (such as the Draft Decision on Investment Funds) have placed greater risk management requirements on managers across the region and this is inevitably driving a desire for better technology. The introduction of new ï¬nancial products, such as ETFs, that are well-established in more developed markets, is also pushing forward technology takeup in the MENA region. As social unrest across the Middle East and North Africa continues and the global ï¬nancial crisis threatens to enter a second dip, investors are looking for quality, transparency and security more than ever. Technology can be a strong factor in providing those assurances and attracting or retaining investors.
34 MENA FUND REVIEW JULY 2011

In the current context of ï¬nancial change and political upheaval in the Middle East and North Africa, how are asset managersâ€™ needs evolving, and how is technology innovating to meet those needs? Hazem Elmalla: MENA Asset Managersâ€™ top issues currently are the political and economic outlook, but also risk management, regulation, oil prices, asset allocation and the shortage of qualiï¬ed professionals. In response to these concerns, technology is offering rapid access to markets so managers can respond to increased volatility. On risk management,

systems are covering more types of risk than ever before, and on asset allocation, they cover more complex and diversiï¬ed asset classes. Suppliers are also offering robust, tailored systems that can cater for new and future regulatory reporting requirements. Finally, they can improve operational efï¬ciency, meaning companies are better equipped to deal with the lack of qualiï¬ed professionals. Robin Strong: For many years, the evolution of global frontier and emerging markets have followed a common pattern, but with different timescales. This starts with only wealthy individuals and corporations investing in the markets, typically buying equities and, where suitable, debt instruments issued by local organisations. With limited governance and relaxed structures personal relationships play a large part in the way business is conducted. As markets evolve, exchanges become electronic and regulators impose greater structure, opening the market to a retail client base investing directly via stockbrokers and

TECHNOLOGY

international investors seeking returns from growth economies. This results in the growth of investment management ï¬rms offering collective investments, tax efï¬cient savings and retirement planning. The vast array of high net worth, retail and institutional investors that operate in the MENA markets today demand powerful and adaptable technology architecture whether to manage portfolios for oneself or others, to actively trade on local and international markets, or to deal with asset allocation, risk, performance or accounting. These requirements are addressed by a combination of local vendors with language, cultural and domestic market skills creating innovative solutions from scratch and international vendors customising their existing systems to take account of local requirements. Fouad Abou Alwan: Compliance is an area where we are seeing increasing interest at all levels. Many institutions already have some internal controls in place, but there is a growing trend towards bringing in specialized systems for suitability and surveillance processing, personal trading monitoring and social media compliance by both institutions and regulatory bodies. What is the expected impact of EU & US regulation in the region (such as AIFMD, Dodd-Frank, MiFID 2)? And

what is the expected impact of the draft UAE Fund Management regulation? How can technology help managers get ready to comply? Hazem Elmalla: Most of the new regulations are still being discussed, but one thing they have in common is the underlying purpose of protecting investorsâ€™ interests. The impact will vary between MENA asset managers, depending on how active they are on EU and US markets. Similarly, although the UAE Fund Management regulation is still in its draft form, it is pushing for increased transparency, disclosure and reports. Technology can help managers comply by giving them instant and reliable access to information on their investments, trades and research, automated reporting, and the capacity to systematize the application of their investment strategy. Robin Strong: There will be some impact on the region, but relatively minor compared to the impact of individual local regulations. Certain international investors will need to understand how market access products, such as p-notes and ETFs, are affected in their fund jurisdictions. International technology solutions, including ours, will be ready for the new regulations or at least have new versions planned to meet their requirements. Fouad Abou Alwan: As the GCC markets

are relatively young, we ï¬nd that a lot of work is still under way in terms of setting rules, regulations, policies and procedures. This effort is driven mainly by the regulatory authorities in each country, such as CMA in Saudi Arabia, both the Central Bank and SCA in the UAE, QFCRA and QFMA in Qatar. Practices from international markets are customized and localized to meet regional frameworks; so, for example, we ï¬nd the â€œDraft Decision on Investment Fundsâ€ setting the groundwork for administrative services companies. The separation between administration and management will bring in specialized service providers to act as third party administrators. Naturally, they will be using proper investment accounting solutions which in turn will facilitate the implementation of best practice and compliance with advanced regulations, such as UCITS III. The Middle East still lags in terms of governance, but there is a trend towards achieving and monitoring better governance. At a recent family business summit in Saudi Arabia, this was one of the key takeaways, and families seem set to bring better corporate governance in their businesses and family ofï¬ces. Is this a passing fad or a real trend? How can technology help asset managers implement better corporate governance?

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JULY 2011 MENA FUND REVIEW 35

TECHNOLOGY

Hazem Elmalla: Many signs converge towards better governance in the region. Regulation is pushing for transparency, private and institutional investors now hold their external managers accountable and keep a close eye on what they are doing, and Islamic ï¬nance is another incentive to improve governance, as part of Sharia compliance. Technology can help introduce a culture of compliance and transparency in a company through systems that enable full audit trails, pre- and post-trade compliance checks, and detailed reporting. To better monitor their risks, portfolios and third parties, managers need a holistic view of their investments â€“ this requires systems that support multiple asset classes and provide connectivity to external managers and providers. Robin Strong: Like Asia Paciï¬c, there is no single regulatory body producing regulations that affect the entire region. In Europe, it took many decades of political reform to establish a political structure to support such regulations and it is unlikely that there is an appetite across MENA to do likewise. Individual regulators would be better served by working with their counterparts across the Middle East and reviewing the regulations produced in Europe and North America to assess their applicability locally. This approach has been successfully implemented in China, where an understanding of European UCITS rules improved their ability to regulate locally. Fouad Abou Alwan: In the Middle East, weâ€™re realizing that demonstrably high standards of corporate governance are fundamental to competing on an international level, and as our institutions expand, this will only become more important. Technology is the key to achieving this. The ï¬nancial institutions that implement state of the art technologies will achieve more accurate, complete and real time reporting of risk, returns and performance, improving not only their operational efï¬ciency but also achieving international best practice in corporate governance standards. What is the general attitude towards the use of technology for risk management purposes in the MENA region? Is there a difference between the attitude of family ofï¬ces and asset managers towards risk management in the region, and how does this translate into their use of technology? Hazem Elmalla: There is a strong trend towards more robust risk management,
36 MENA FUND REVIEW JULY 2011

and technology is key to help monitor risks across portfolios and asset classes. 68 percent of fund managers surveyed by Advent earlier this year said they had dedicated more resources to risk management following the economic crisis, and we have seen more appetite for systems, not only for risk management, but also specialised asset management systems vs. the in-house built platforms or spreadsheets previously in use. Family ofï¬ces are traditionally more technology-adverse, but as they face increasing pressure from families to reinforce their risk management, they are also starting to look for ways to optimize their workï¬‚ows. Robin Strong: Risk is an interesting concept, as it means different things to different people. Highly risk averse investors avoid buying equities as their prices can be volatile and capital is at risk, preferring cash on deposit at a range of well capitalised banks. Family ofï¬ces can assess the level of risk they are comfortable with and allocate assets accordingly. Fund managers who are investing collectively on behalf of third-parties need to understand the risks they take and ensure that they are in line with mandates, prospectuses, regulations, etc. and this may require investment in technology solutions to support these analyses. Fouad Abou Alwan: New regulations, both international (such as the Dodd-Frank Act) and local (such as the Draft Decision on Investment Funds) are becoming more stringent in their risk management requirements. Reporting requirements on areas like stress testing and liquidity will inevitably trigger a demand for IT, data and specialized solutions in risk management that need to be integrated within portfolio management tools. As a natural consequence of more stringent regulation and higher client demands/corporate governance, asset managers need to offer clients regular, clear and comprehensive reporting within tighter deadlines. How are they currently dealing with this? Hazem Elmalla: More and more asset managers are looking to integrated portfolio management and reporting systems to deal with this, especially given the shortage of ï¬nancial professionals in the region. STP is becoming increasingly crucial, for the information to ï¬‚ow automatically throughout the lifecycle of trades, reducing the risk of errors and enabling daily reporting. Asset managers are also looking for highly customizable systems, to respond to individual clientsâ€™

demands and regulatory requirements. Many managers are still using spreadsheets, word documents, paper trails or in-house systems, but as a consequence of the increased pressures, more and more are now investing in specialised systems. Robin Strong: Client reporting systems have evolved massively in light of expectations deriving from the â€œinternet worldâ€ where everything is available online all the time, and concerns driven by recent market crises that resulted in a greater demand for transparency. A wide range of systems are available speciï¬cally to deal with this and most fund accounting systems and most brokers/custodians/administrators are able to offer an accurate view of portfolios and transactions within tight timescales. Fouad Abou Alwan: In this region, the challenge lies in being able to follow international standards while taking into account the local market speciï¬cs. So ï¬nancial institutions need to go the extra mile in reporting risk and performance while meeting regulatory compliance in order to regain investor conï¬dence. This obviously goes hand in hand with achieving better corporate governance and better regulatory controls. To do this, ï¬nancial institutions will need to adopt the latest technology and tools in order to achieve operational efï¬ciency. In the wake of the ï¬nancial crisis, which included a liquidity crisis, managers need to be extremely careful in their asset allocation and liquidity management. How does this impact them? Hazem Elmalla: Managers need access to timely and accurate information that will allow them to make quick investment decisions. They also need to diversify their investments, requiring systems that can manage all asset types and that will give an accurate view of positions across portfolios, to avoid over-exposure to a single asset or issuer, as well as portfolio construction and asset allocation capabilities. Using tools like modeling and rebalancing will enable them to stay on top of their asset allocation and selection, in order to grow their business without requiring additional staff. This also reinforces the need for robust risk management systems that cover all types of assets. Robin Strong: This greatly depends on the type of manager and what scope they have to invest. For example, the manager of an equity fund that has a limit on the amount of cash it can hold is limited in his/her investment choices. When market
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TECHNOLOGY

sentiment turns negative, the only option is to invest in counter-cyclical stocks and defensive stocks. On the other hand, a hedge fund/proprietary trader/family ofï¬ce may have access to other tools, such as going 100 percent cash, the use of hedging instruments or actively managing a portfolio of non-correlated assets. Of course some investments are inherently non-liquid, especially in the Middle East where real estate is such a signiï¬cant asset class. A good manager understands how to construct a portfolio such that sudden cash calls do not result in asset ï¬resales. With more stringent regulation postï¬nancial crisis, how has technology helped in facilitating compliance? Hazem Elmalla: As previously discussed, a lot of the regulation is aimed at increasing transparency, reporting, due diligence and risk management. Technology has helped this by providing ever more integrated and connected systems, so information from brokers, custodians and market data providers all feed directly into portfolio management and trade order management systems, improving best execution, reducing the risk of errors, improving the speed and accuracy of reporting, and enhancing control over trades to ensure the application of the strategy and the respect of external regulation and internal rules. Robin Strong: Compliance is less onerous in some markets than in others. The terms â€œcomplianceâ€ is also used to cover different areas. For example, â€œinvestment complianceâ€ ensures that portfolio mandates and regulatory requirements are adhered to, while â€œtrading complianceâ€ is often more concerned with surveillance and market abuse. Technology solutions are instrumental to these compliance processes but it should be noted that technology solutions are not a panacea â€“ the results are only as good as the internal processes and supporting data. Fouad Abou Alwan: With the speed of regulatory change in the last few years, investment ï¬rms cannot afford to adopt a reactive approach to the continuously evolving compliance requirements. They need to take a proactive approach. Partnering with a leading technology provider will help them swiftly respond to regulatory requirements (such as the Dodd Frank Act), proactively manage their risks, report them transparently to all concerned stakeholders, and implement controls on their own compliance requirements.
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How would you compare adoption of technology by asset management practitioners in the Middle East to that in Europe or the US? Hazem Elmalla: The MENA region is still in development mode in terms of advanced systems adaptation compared with the US or Europe. MENA asset managers are currently going through a learning process to understand which systems are better equipped to meet their requirements and which are more tailored to this regionâ€™s type of investments, market regulations etc. Many are still on the learning curve, but they are becoming savvier, and they have an added advantage, in that they can learn from mistakes that have been made in other more mature markets, and that they can therefore avoid them. This is deï¬nitely a space to watch. Robin Strong: The Middle East is still an evolving collection of local markets. Markets such as Kuwait and Saudi Arabia are not easy for international investors to access, despite potentially offering attractive returns. The investments in Dubai, both locally to establish InternetCity and externally from businesses investing in the region, have improved access to Middle East markets to international investors. In terms of technology, larger ï¬rms have invested in the same state-of-the-art software as their counterparts in more developed markets and smaller ï¬rms are catching up fast. Fouad Abou Alwan: Fund managers in more established regions are constantly upgrading to adapt to industry change. If they take the right approach, Middle East fund managers have a great opportunity right now to adopt the right solution right away and quickly catch up with other regions like the US and Europe. And the introduction of ï¬nancial products that are well established in the US, such as ETFs, are providing a second driver for technology adoption in the Middle East. In general, Middle Eastern markets have quickly evolved over the last decade; while some regional players have made â€œinterimâ€ system upgrades, others have fallen short with their new solutions due to the rapidly changing landscape. New regulatory frameworks and increasingly demanding investors (both regional and international) have put regional players under pressure to bring in best of breed systems. Implementing systems such as ours can help institutions improve their transparency and efï¬ciency and meet the needs of all their stakeholders. These are themes that are universal.

Hazem Elmalla, regional senior solutions consultant, Advent EMEA

Robin Strong, director of buy-side market strategy, Fidessa

Fouad Abu Alwan, regional sales manager, Sungard

JULY 2011 MENA FUND REVIEW 37

INDUSTRY COMMENT

Key requirements
successful fund. Primary factors that should be taken into consideration when choosing an administrator are customer service, responsiveness and cultural alignment. It is key for fund managers selecting an administrator to understand the requirements of their investors, which will include, although are not limited to: independence, service expectations, assetclass specialism, fund structure experience, systems and operational controls. The size and ï¬t of the administrator is also important. If the administrator is very large in relation to the fund and its manager then the manager may not be treated as an important relationship. If it is too small, the administrator may have limited ability to provide a full service range such as jurisdictional coverage, best practice knowledge and asset specialism. A fund manager will also look to their administrator to demonstrate local understanding as well as the ability to provide strong governance. With a wide range of current regulatory challenges, notably AIFMD, the DoddFrank Act, FACTA and Basel III, understanding and adapting to such developments across multiple jurisdictions requires that administrators devote appropriate resources to their regulatory compliance functions. Fund managers are facing increased regulatory obligations themselves and administrators such as Sanne are able to assist them through training, brieï¬ng papers and ensuring they obtain the best third-party advice available. Looking ahead, the new regulatory environment represents an opportunity for Luxembourg as it can build on its extensive expertise in UCITS in particular to strengthen its leading position as a fund domicile. Luxembourg has established itself as a key private equity, real estate and â€˜regulatedâ€™ hedge funds hub with asset managers appreciating the countryâ€™s

Regulatory demands are placing greater emphasis on the need for the right administrator and domicile, according to Peter Dickinson, director at Sanne Group (Luxembourg)

INDUSTRY COMMENT
readiness to deal with new regulation, and those planning new launches in the coming year will naturally look to Luxembourg for clarity. It is important that administrators can proactively adapt to these regulatory changes. This environment of change has provided opportunities for quality administrators who can demonstrate strong compliance monitoring capabilities and experienced staff capable of implementing robust governance and regulatory frameworks. Sanne Groupâ€™s fund administration business is a leading provider of independent administration services to global asset managers. With assets under administration in excess of $15bn, the business employs more than 40 staff in its primary service centres in the Channel Islands, Luxembourg, Dubai, Hong Kong and Shanghai with specialist teams focused on private equity, venture capital, listed funds, debt, real estate and alternative asset classes (including life science and oil and gas, carbon credits, art and infrastructure and technology). Services include fund structuring, regulatory compliance, investor acceptance, corporate governance and management and control, ï¬nancial and investor reporting as well as general administration services such as cash and transaction management. Our Luxembourg ofï¬ce offers an experienced and multi-lingual management and operations team with extensive experience administering a range of fund structures including SICARs, SIFs and UCIs. Sanneâ€™s MENA based team has an excellent understanding of the service requirements of the diverse and professional customer base within the region and has strong working relationships with legal providers, accountancy ï¬rms, banks and custodians within the local market.
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Peter Dickinson, director, Sanne Group

LUXEMBOURG is one of the largest funds jurisdictions worldwide and offers an attractive legislative environment for all types of investment vehicles. As the second largest fund centre in the world behind the United States the overall Luxembourg market has 2.2 trillion of assets under management. The success of Luxembourg as an investment fund jurisdiction can be attributed to the countryâ€™s business orientated regulation, combined with a favourable tax environment and an expert professional services and fund administration industry. The development of the fund administration sector in Luxembourg over the past decade has been a key component in the growth of Luxembourg as a premier fund centre. While the asset servicing sector is not the most high proï¬le part of the investment management value chain, high quality administration and reporting capabilities are key requirements for running a viable fund. As regulatory demands increase across regions it is important to focus on the key attributes required when selecting the right administrator and the important role such administrators can have in assisting a

Sanne Trust Company Limited is a member of the Sanne Group and is regulated by the Jersey Financial Services Commission. Sanne Group (Luxembourg) S.A. is a member of the Sanne Group and is regulated by the Commission de Surveillance du Secteur Financier. Sanne Group Dubai Limited is a member of the Sanne Group and is licenced to conduct business activities by the Dubai International Finance Centre. Sanne Group Asia Limited is a member of the Sanne Group and is licenced to conduct business in Hong Kong. Sanne Group Shanghai Financial Management & Consulting Co Limited is a member of the Sanne Group and is licenced by the State Administration of Industry and Commerce.